Advertisement
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.

Advertisement - Article continues below

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.

Advertisement
Advertisement - Article continues below

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.

Advertisement

Most Popular

HSAs Get Even Better
Financial Planning

HSAs Get Even Better

Workers have more options with flexible spending accounts, too.
July 2, 2020
2020 Stock Market Holidays and Bond Market Holidays
Markets

2020 Stock Market Holidays and Bond Market Holidays

Is the market open today? Take a look at which holidays the stock markets and bond markets take off in 2020.
July 1, 2020
Find a Great Place to Retire
happy retirement

Find a Great Place to Retire

Our cities provide plenty of space to spread out without skimping on health care or other amenities.
July 2, 2020

Recommended

10 Stocks to Invest in the Health Care Revolution
healthcare stocks

10 Stocks to Invest in the Health Care Revolution

These companies are fighting disease and improving our standard of care.
July 2, 2020
Cash In With This Gaming ETF
Technology

Cash In With This Gaming ETF

Cash in on the video gaming craze with this fund.
July 1, 2020
13 Best Vanguard Funds for the Next Bull Market
mutual funds

13 Best Vanguard Funds for the Next Bull Market

Optimistic that the bounce since March is indeed the start of the next bull market? Here are the 13 best Vanguard funds to help you make the most of i…
June 25, 2020
A Mid-Cap Fund With Big Gains
mutual funds

A Mid-Cap Fund With Big Gains

The fund’s best performers over the past year were software firms.
June 24, 2020