investing

3 Ways to Earn 5% to 9% from Closed-End Funds

The trick to these investments is to buy in when they trade below the underlying net asset value of their holdings.

Traditional mutual funds and exchange-traded funds are "open end" because there is theoretically no limit to the number of shares sponsors can issue to satisfy investor demand. By contrast, closed-end funds have a set number of shares outstanding at any moment. CEFs raise capital by going public via an initial public offering. Fund managers then use the money raised to buy stocks, bonds or other investments. If managers are successful, over time, the value of assets in the fund should grow and the shares' value should rise. But the day-to-day price of CEF shares is a function of investor demand–which means the share price at any time could trade above or below the per-share value of the assets. For many investors, the attraction is buying when shares trade below the value of the assets–that is, at a discount.

The risks: Many CEFs borrow money to boost their investment buying power. If the investments bomb, that debt can compound losses, sending a fund's share price tumbling. That's one reason CEFs require a lot of investigating, says John Cole Scott, chief investment officer at Closed End Fund Advisors, a specialist in the funds. "You've got to understand what you own," including how much borrowing is involved, he says.

How to invest: Bond CEFs are popular because they often sport high yields to attract investors. One idea worth investigating: DoubleLine Income Solutions (DSL, $20, 8.9%). The fund can invest anywhere in the world in search of high income. Recently, emerging-markets bonds were 44% of assets and corporate junk bonds were 24%. The fund's duration is 5.4, and shares recently traded at a 5% discount. Borrowed money as a percentage of investment assets–an important yardstick known as the leverage ratio–was recently 29%, modestly above the average 25% for taxable closed-end bond funds.

Another go-anywhere fund to consider is BlackRock Multi-Sector Income Trust (BIT, $17, 8.4%), which has a relatively low duration of 2.8 and a leverage ratio of 41%. The shares were recently trading at a 12% discount to net asset value.

Stephen Janachowski, head of financial advisory firm Brouwer & Janachowski, suggests another CEF-related idea: RiverNorth/DoubleLine Strategic Income Fund (RNDLX, 4.6%). This conventional mutual fund recently had half its assets invested in shares of individual CEFs and the rest in a mix of bonds. The fund, with a duration of 4.6, seeks to exploit opportunities in CEFs that are trading at discounts.

Most Popular

Where's My Refund? How to Track Your Tax Refund Status
tax refunds

Where's My Refund? How to Track Your Tax Refund Status

If you're waiting for your tax refund, the IRS has an online tool that lets you track the status of your payment.
March 2, 2021
Where's My Stimulus Check? Use the IRS's "Get My Payment" Portal to Get an Answer
Coronavirus and Your Money

Where's My Stimulus Check? Use the IRS's "Get My Payment" Portal to Get an Answer

The IRS has an online tool that lets you track the status of your stimulus checks.
February 19, 2021
Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021

Recommended

T. Rowe Price Financial Services Banks on a Turnaround
Stock Market Today

T. Rowe Price Financial Services Banks on a Turnaround

This fund is a good way to bet on an economic rebound.
February 24, 2021
DSTL: A Value Fund With a Twist
Becoming an Investor

DSTL: A Value Fund With a Twist

The fund’s 51.3% return since its inception in 2018 has more than tripled that of traditional value funds.
February 24, 2021
2 Top-Tier T. Rowe Price Mutual Funds
mutual funds

2 Top-Tier T. Rowe Price Mutual Funds

T. Rowe Price's mutual funds typically stand out among their peers, but these two selections provide elite equity and bond exposure for this point in …
February 24, 2021
Earth-First Funds Are Soaring
Markets

Earth-First Funds Are Soaring

Funds with sustainability in mind are super popular these days; these six are ready to deliver returns.
February 24, 2021