Ever since the first U.S.-listed exchange traded fund (ETF) launched in January 1993, the number of investable products competing for a finite pool of investor capital has steadily increased.

That competition has fueled rapid innovation in ETFs, but it's also contributed to the decline of older fund structures. Mutual funds, in particular, have steadily lost ground.

Framing this trend as a battle between ETFs and mutual funds leaves out other fund types that have fallen out of the spotlight. Chief among them are closed-end funds, or CEFs.

Today, CEFs rarely come up outside of year-end tax-loss harvesting discussions or income-focused investor circles, yet some have long track records and enviable yields.

Structurally different from both ETFs and mutual funds, CEFs introduce unique risks tied to leverage, premiums and discounts and taxes.

Here's what you need to know about closed-end funds, including the best CEFs to buy in 2026.

Your 2026 closed-end fund crash course

Closed-end funds are defined by four basic features: the ability to trade at discounts or premiums to net asset value (NAV); high yields via managed distribution policies; access to less liquid assets; and the use of leverage.

The number of CEF shares is generally fixed at inception, aside from possible secondary or rights offerings. Because there is no ongoing creation or redemption mechanism, CEFs can trade at prices that diverge materially from NAV.

These premiums and discounts can work for or against investors. Buying at a wider-than-normal discount and later seeing it narrow can add to returns, but there is no guarantee this ever happens.

Income is another defining feature. CEFs are frequently structured to deliver high and steady payouts. Those distributions can come from multiple sources: portfolio income, such as dividends or bond coupons; option strategies, like covered calls; or from realized capital gains via selling appreciated securities.

In many cases, however, CEF distributions also include a sizable return of capital portion, which isn't immediately taxable and decreases your adjusted cost basis.

The closed-end structure also gives CEF managers more flexibility to own less liquid assets such as private credit or private equity. In contrast, open-end funds have to manage daily inflows and outflows, which creates a constant need for liquidity.

Leverage is the final major quirk that tends to polarize CEF investors. Many CEFs borrow against their assets to amplify returns and income. A fund with $1 billion in assets that borrows an additional $100 million is effectively leveraged about 1.1 times.

Leverage can enhance performance and boost yields, but it also magnifies losses and introduces borrowing costs. Those costs are one reason CEF expense ratios are typically higher than those of ETFs. None of these traits are inherently good or bad. They simply make CEFs different from mutual funds and ETFs.

How we picked the best CEFs for 2026

We focused on identifying five best-in-class CEFs that strike a reasonable balance across different strategies, asset classes and risk profiles. That meant looking beyond short-term metrics and emphasizing characteristics that matter to long-term investors.

We prioritized CEFs that have been operating for many years and have reached a size that reduces the risk of liquidation or forced restructuring. And we generally limited our selections to funds with at least $1 billion in assets under management.

For each fund, we focused on transparency and investor understanding rather than rigid screening rules. We highlight key data points such as expense ratios, current distribution rates, premiums or discounts to NAV, and leverage employed to provide context.

The result is not a formula-driven list, but a curated selection designed to help investors understand what they are buying and why a given CEF may or may not belong in a long-term portfolio.

• Assets under management: $2.9 billion
• Expense ratio: 0.50%
• Price vs NAV: -5.1% discount
• Distribution rate (price): 7.53%
• Leverage employed: 0%

The Adams Diversified Equity Fund (ADX) is among the oldest listed entities on the New York Stock Exchange, dating back to 1929. Before becoming a CEF, it operated as Adams Express, a stagecoach company that successfully reinvented itself as an investment company once railroads displaced its original business.

ADX follows a straightforward mandate, and the actively managed portfolio with a clear long-term orientation includes U.S. large-cap stocks that look at lot like components of the S&P 500.

One of its defining features is its managed distribution policy. Historically, ADX paid modest quarterly distributions followed by a large year-end payout tied to realized capital gains. More recently, it shifted to a smoother structure targeting 2% of NAV per quarter, or roughly 8% annually.

ADX also stands out for its low cost within the CEF universe. With a 0.50% expense ratio, a $10,000 investment incurs about $50 per year in fee drag, which is unusually modest.

Finally, unlike many CEFs, ADX does not use leverage at all. And, over the past decade, the fund has delivered a 14.4% annualized return based on NAV.

Learn more about ADX at the Adams Funds website.

• Assets under management: $7.4 billion
• Expense ratio: 1.67% (4.46% including interest expense)
• Price vs NAV: +4.45% premium
• Distribution rate (price): 15.77%
• Leverage employed: 31.97%

The PIMCO Dynamic Income Fund (PDI) is run by a firm with a long history in bond management and a brand that still carries weight with many income investors. This PIMCO fund's mandate is flexible, and it typically builds its portfolio across multiple higher-yielding credit sectors rather than sticking to plain-vanilla investment-grade bonds.

In practice, that often means meaningful exposure to non-investment-grade corporate credit, or junk bonds, alongside securitized holdings such as non-agency mortgage-backed securities and other structured credit, with the mix shifting as PIMCO's managers see relative value.

The other defining feature is leverage. For every $100 of investor capital, PDI is currently borrowing roughly $32 to increase exposure. Pairing leveraged exposure with a portfolio tilted toward higher-yielding credit is a big part of how the fund supports its 15.77% distribution rate.

However, investors still need to pay attention to valuation and cost. PDI often trades at a premium to NAV, reflecting both its popularity and PIMCO's reputation, and that premium can widen or narrow independent of what the underlying holdings are doing.

The fund trades at a 4.45% premium, which is notably lower than its 52-week high premium of 17.57% in September.

The stated expense ratio is 1.67%, but once interest expense tied to leverage is included, total costs rise to 4.46%, which can be a drag.

Learn more about PDI at the PIMCO provider site.

• Assets under management: $1.4 billion
• Expense ratio: 1.20% (2.12% including interest expense)
• Price vs NAV: −5.24% discount
• Distribution rate (price): 12.97%
• Leverage employed: 26.20%

CEFs like Tortoise Energy Infrastructure (TYG) once allowed investors to gain master limited partnership (MLP) exposure without the complexity of Schedule K-1 tax forms by sending unitholders a single Form 1099-DIV.

TYG continues to follow this legacy approach, offering exposure to energy "middlemen" in a tax-simplified wrapper, with a portfolio spanning natural gas infrastructure, liquids pipelines and power infrastructure assets.

Despite its reputation as an MLP-focused fund, MLPs make up only about 20% of the portfolio today. The remaining roughly 80% consists of common equity holdings, primarily midstream energy stocks.

The fund's high distribution rate reflects both the income-oriented nature of the midstream sector and the pass-through characteristics of MLPs, in addition to the use of leverage and return of capital.

Learn more about TYG at the Tortoise Capital provider site.

• Assets under management: $3.8 billion
• Expense ratio: 0.88% (2.09% including interest expense)
• Price vs NAV: +0.07% premium
• Distribution rate (price): 5.77%
• Leverage employed: 18.84%

TYG is not the only sector-specific closed-end fund investors gravitate toward for income. Another long-standing and widely followed option is the Reaves Utility Income Fund (UTG), which applies a similar closed-end structure to utility stocks.

The portfolio primarily holds dividend-paying stocks, but it can also allocate to preferred stock and bonds, giving the managers flexibility across the utility capital structure.

UTG makes meaningful use of leverage, currently around 19% of total assets. That leverage helps boost income potential, but it also raises interest expense and introduces sensitivity to rising interest rates.

Utilities can face headwinds in higher-rate environments because they are capital-intensive businesses that rely on borrowing, and their cash flows tend to be less attractive when yields elsewhere rise.

Despite those risks, UTG has delivered solid long-term results for investors willing to hold through cycles. Over the past 10 years, the fund's net asset value has compounded at an annualized rate of 10%.

While the current 5.8% distribution rate is not the highest among CEFs, the payout has historically been sustainable. And the distribution is paid monthly, which appeals to income-focused investors seeking consistency.

Learn more about UTG at the Reaves provider site.

• Assets under management: $8.7 billion
• Expense ratio: 0.45%
• Price vs NAV: −4.81% discount
• Distribution rate: 0%
• Leverage employed: 0%

The closed-end fund structure is also well suited to holding commodities, not just equities and fixed income.

One of the most recognizable issuers in this space is Sprott, a specialist asset manager focused on precious metals and mining-related investments. Sprott's lineup of physically backed commodity CEFs spans gold and silver as well as platinum, palladium, uranium and copper.

The Sprott Physical Gold and Silver Trust (CEF) combines physical gold and silver in a single vehicle, with the current allocation split at roughly 59% gold and 41% silver.

It does not use leverage, and it does not pay a distribution. That simplicity makes it appealing as a satellite allocation for investors seeking direct exposure to precious metals.

CEF also tends to trade closer to its NAV than many competitors, and it's currently available at only a modest discount. With a 0.45% expense ratio, it ranks among the more affordable CEFs, even undercutting even the venerable ADX.

Learn more about CEF at the Sprott provider site.

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If you're looking for income investments in 2021, best of luck. While bond yields are bouncing back, the 10-year still yields a paltry 1.6%, and the S&P 500 yields even less.

If you need a far greater yield than that from the income portion of your investment portfolio, you might consider investing in pass-through securities. These are defined as securities that pass through a majority of their capital gains and investment income.

Four major types of pass-through securities include closed-end funds (CEFs), real estate investment trusts (REITs), business development companies (BDCs), and master limited partnerships (MLPs).

Let's take CEFs, for example. According to BlackRock, the average yield for CEFs in the fourth quarter of 2020 was 7.8% and 11.5% based on net asset value (NAV) and market price, respectively. That's not just better than the S&P 500 and 10-year T-notes – that's better than almost anything else you can find on the market. The same is generally true for the other pass-through security types.

If you're willing to look beyond Wall Street's best-traveled areas of yield, read on as we discuss 10 income investments that stand out among the most interesting opportunities.

Data is as of March 15. Dividend yields are calculated by annualizing the most recent payout and dividing by the share price.

• Market value: $8.3 billion
• Dividend yield: 8.5%

The first of two business development companies (BDCs), Ares Capital Corporation (ARCC, $18.88), is one of the largest direct lenders in the U.S. It looks for companies with stable cash flow, a large moat, growth prospects and a seasoned management team.

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Business development companies are income investments that provide funding to small and midsized businesses. In this case, Ares Capital provides all kinds of loans, including lines of credit, first and second liens and subordinated loans. It also makes non-control equity investments, although those represent just 15% of its $15.5 billion portfolio.

The portfolio of loans and equity has been made to more than 350 companies backed by 172 different private equity firms.

If you want to know who the players are in middle-market private equity, all you need to do is look through a list of Ares' investments. You'll quickly see who owns what.

Since its IPO in October 2004, Ares Capital has invested approximately $63 billion in middle-market lending across more than 1,400 transactions, generating a realized asset level gross internal rate of return (IRR) of 14%. It also has generated a total cumulative return since its IPO that's 50% higher than the S&P 500.

It is externally managed by Ares Management (ARES), which manages more than $197 billion in assets under management, including $146 billion from direct lending and other credit-related investment strategies.

ARCC might not make you rich overnight. But it should be a worthwhile income investment, providing high and stable yield over the long haul.

• Market value: $986.5 million
• Dividend yield: 8.9%

Bain Capital Specialty Finance (BCSF, $15.28) is another BDC, this one externally managed by BCSF Advisors LP, a subsidiary of Bain Capital. U.S. senator and one-time presidential candidate Mitt Romney launched the alternative asset manager in 1984 after rising the ranks at the consultant Bain & Company, which provided seed money. (Romney left in 1999.)

BCSF commenced operations in October 2016. It went public two years later, in November 2018, raising $152 million in its initial public offering. Since its 2016 launch, the BDC has grown total assets to $2.60 billion, and total net assets to $1.07 billion.

A majority of the BDC's investment portfolio is dedicated to first lien senior secured loans, which accounted for 87% of its $2.5 billion in fair value at the end of 2020. BCSF generated $183 million in interest from its investments, along with $9.3 million in dividend income and $2.1 million from other income-producing securities.

The BDC continues to strengthen its balance sheet while delivering strong earnings for shareholders. The weighted average yield during Q4 at fair value was 7.5%, 20 basis points higher than in the third quarter. The BDC's outstanding debt had a weighted average interest rate of 3.2%, providing an attractive 430-basis-point spread between what it brings in and what it pays out.

Looking forward, BCSF announced in February a strategic partnership with London-based asset manager Pantheon to provide direct lending to middle-market companies in Europe and Australia, which should deliver greater global capabilities. Bain Capital is contributing $320 million in senior secured loans to the joint venture, and it will own 70.5% of the joint venture. Pantheon will hold the rest.

• Market value: $2.1 billion
• Dividend yield: 7.8%

The first of two real estate investment trusts, Arbor Realty Trust (ABR, $16.91), provides mortgages for owners of multifamily and commercial real estate assets. This mortgage REIT (mREIT), which got its start in 2003, operates two businesses: Structured Loan Origination and Investments, and Agency Loan Origination and Servicing.

Arbor's structured business invests in a portfolio of bridge and mezzanine loans for multifamily, single-family rental and commercial real estate. It also invests in actual real estate and real estate-related notes and other securities. The agency business originates and services multifamily loans for third parties such as Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac) and several other federal government housing agencies.

In its most recent quarterly report, Arbor announced that its agency business had grown by 23% in 2020, to $24.6 billion. That included record Q4 loan originations of $2.75 billion, up 87% year-over-year.

As for the REIT's structured business, its loan portfolio is now nearly $5.5 billion, almost 28% higher year-over-year.

"Arbor continues to be very well positioned to succeed in the current economic climate. Our business model gives us diversified opportunities for growth and has allowed us to outperform in the commercial mortgage REIT space," says Ivan Kaufman, CEO of Arbor Realty Trust.

Dividend growth is an important aspect of income investments, and Arbor is getting back on track on that front. ABR, which had been increasing its dividend quarterly until the pandemic hit, has started a new streak, recording three consecutive quarters of higher payouts. The latest upgrade was by a penny per share to 33 cents quarterly. Arbor's annual payment of $1.32 yields nearly 8%.

• Market value: $38.0 billion
• Dividend yield: 3.4%

Of the 10 income investments discussed in this article, datacenter REIT Digital Realty Trust (DLR, $135.07) leans the most on capital appreciation as opposed to income.

Over the past five years, the office and data center REIT delivered an annualized total return of 12.4%, more than double its peers. Of that, more than 3 percentage points was from dividends. While Digital Realty Trust's yield might not draw a crowd from income investors, its 15-year dividend growth streak should.

With the cloud and digitalization continuing to grow, data centers should continue to be in significant demand for the foreseeable future. DLR finished the fourth quarter ended Dec. 31, 2020, with 291 data centers and 35.9 million square feet of space available on six continents, including North America. It also has 5.4 million square feet under active development and another 2.3 million square feet for future expansion.

In fiscal 2021, it expects revenues of at least $4.25 billion with adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of at least $2.3 billion. That translates to "core" funds from operations (FFO, an important REIT profitability metric) of $6.45 per share at the midpoint. That's a 9% year-over-year revenue increase and a 4% increase in core FFO.

In the fourth quarter alone, Digital Realty signed new leases for 972,507 square feet worth $130.3 million on an annualized basis and $122 in base rent per square foot.

With a total debt of just $13.4 billion or 34% of its market cap, DLR remains a solid play for long-term income investors.

• Market value: $1.6 billion
• Distribution yield: 9.8%*

It's hard to imagine an energy-related income investment doing well over the past few years. Nonetheless, Tennessee-based master limited partnership (MLP) Delek Logistics Partners LP (DKL, $37.24) has delivered a five-year annualized total return of 12.7%, well more than twice the return of its midstream peers.

DKL was spun out from Delek US Holdings (DK) in November 2012. At the time, DK owned 66% of its units (shares of an MLP). Today, it owns 80% of the limited partnership.

According to its December 2020 presentation, Delek Logistics transports crude oil across more than 805 miles of pipeline. It also has storage capacity of more than 10 million barrels of oil. In addition to that, DKL owns a rail offloading facility and a wholesale marketing business that sells refined products from independent third parties and Delek U.S. refining operations.

In the company's most recently reported quarter, it earned 94 cents per unit of net income attributable to all partners, up from 52 cents per unit in the year-ago quarter. Distributable cash flow (DCF, an important metric that speaks to the sustainability of MLP distributions) was $55.9 million, from $33.0 million in Q4 2019. That gives the firm a DCF coverage ratio of 1.41x – much better than the 1.08x in the year-ago quarter – implying a much more secure distribution.

In a challenging operating environment, DKL continues to deliver the goods.

• Assets under management: $964.0 million
• Distribution rate: 10.3%*
• Expenses: 1.75%**

Closed-end funds (CEFs), unlike open-ended mutual funds, trade on an exchange, and do so at a limited number of shares outstanding. As a result, they can trade at a discount or premium to the net asset value of the fund's assets, depending on investor interest and other factors.

CEFs also tend to offer up large distributions, so we'll cover three of them here. First up is Guggenheim Strategic Opportunity Fund (GOF, $21.08), which seeks to maximize returns utilizing both quantitative and qualitative analysis to find investments that are trading below their fair value.

GOF can invest up to 20% of its total assets in non-U.S. dollar-denominated fixed-income securities, up to 50% of its assets in common stocks, and up to 30% in investment funds that invest in securities GOF already owns directly. Lastly, it can invest as much as it wants in junk bonds.

The CEF uses leverage to enhance its returns beyond what an unleveraged fund might achieve. Leveraging does add an element of risk to the fund by increasing the potential losses. At present, the fund's leverage is 37.7% or $363 million of its $964 million in total assets.

Since its inception in July 2007, GOF has achieved an annualized total return of 11.6% through Dec. 31, 2020. Over the past year, it has earned a total return of roughly 47%.

The CEF pays a monthly distribution of 18.21 cents per share. On an annualized basis, that yields more than 10%.

The only downside of buying GOF right now is its significant premium. It currently trades at a 20% premium to its NAV, which is more than double its five-year average premium of 8.1%.

* Distributions can be a combination of dividends, interest income, realized capital gains and return of capital.

** Includes interest expenses.

Learn more about GOF at the Guggenheim provider site.

• Assets under management: $702.9 million
• Distribution Rate: 8.1%
• Expenses: 3.59%*

The Invesco Dynamic Credit Opportunities Fund (VTA, $11.16) invests in corporate variable-rate and fixed-rate loans made to businesses across many sectors, industries and geographic regions.

Its primary goal is to provide a high level of income to investors, with capital appreciation being a secondary consideration.

Of the fund's 536 bond holdings, the vast majority are non-investment-grade, or "junk." However, the fund's Senior Portfolio Manager, Scott Baskind, is head of Invesco's Global Private Credit business and has been with Invesco since 1999. His experience with corporate loans dates back to the mid-1990s. In other words, VTA is being run by someone who knows how to select opportunities in the junk-bond market.

Like GOF, Invesco's fund is allowed to use leverage to enhance returns. At the end of December 2020, it had 29% leverage and $201 million outstanding.

Dynamic Credit Opportunities' top 20 weightings accounted for 27.5% of its total portfolio at last check. The average loan in its portfolio was $2.6 million.

VTA pays a monthly distribution rate of 7.5 cents per share, which annualizes to an 8%-plus yield. It currently trades at a 7.7% discount to NAV, but that's still a little narrower than its five-year average discount of closer to 11%.

* Includes interest expenses.

Learn more about VTA at the Invesco provider site.

• Assets under management: $673.8 million
• Distribution rate: 8.3%
• Expenses: 2.36%*

The final of three CEFs is the BlackRock Multi-Sector Income Trust (BIT, $17.95). It invests at least 80% of its assets in loans and debt instruments or through synthetic derivatives to generate above-average current income and future capital appreciation.

Since its inception in February 2013, BIT has achieved an annual total return of 7.6% through Dec. 31, 2020, 119 basis points less than its NAV return over the same period.

Its portfolio contains nearly 2,300 holdings. The U.S. represents 77% of its assets, while China, the United Kingdom, and Canada are weighted slightly above 2%. France, Luxembourg, Mexico and others round out its geographic representation.

Like the other two CEFs, BIT uses leverage. It currently uses roughly 34% leverage, or $351.1 million outstanding. The typical loan's principal is repaid after 10.2 years.

And like VTA, BIT also owns a lot of non-investment-grade debt. But a higher percentage of its portfolio (~30%, versus ~7% for VTA) is in BB-rated debt or higher (investment-grade).

You can buy BIT's assets at a small 2.7% discount to NAV at the moment – not bad, but a smaller discount than its five-year average of 8.9%.

* Includes interest expenses.

Learn more about BIT at the BlackRock provider site.

• Assets under management: $1.4 billion
• SEC yield: 5.1%
• Expenses: 0.23%

As its name suggests, the Global X US Preferred ETF (PFFD, $25.41) invests in a basket of preferred stocks. PFFD tracks the performance of the ICE BofAML Diversified Core U.S. Preferred Securities Index.

The index invests in several preferred stock categories, including floating-rate, variable-rate, and fixed-rate preferreds, cumulative and non-cumulative preferreds, and trust preferreds. All securities included in the index must be listed on a U.S. stock exchange.

Investors often avoid preferred shares because they're considered hybrid securities, neither equity nor debt instrument. However, they can play a useful role for anyone looking to generate income from their investment portfolio.

PFFD provides investors with a higher yield than you might get from traditional dividend-paying stocks while doing so monthly. Equally important, it charges annual expenses that are less than many of its competitors.

Since its inception in September 2017, Global X US Preferred has delivered an annualized total return of 6.9%. It might not be the sexiest investment out there, but it has managed to attract more than $1.4 billion from investors, which says it has more going for it than meets the eye.

Its 290 holdings include preferreds issued by Bank of America (BAC), Danaher (DHR) and NextEra Energy (NEE).

Learn more about PFFD at the Global X provider site.

• Assets under management: $34.3 million
• Dividend yield: 9.2%
• Expenses: 3.19%*

The GraniteShares HIPS US High Income ETF (HIPS, $14.76) is one of the most expensive income investments on this list at 3.19% in annual expenses. But it's important to note that if you invested in each of its 61 holdings individually, you'd still be eating most of those same fees.

HIPS, which stands for "high-income pass-through securities," seeks to track the performance of the TFMS HIPS Index, which invests in … well, high-income securities with pass-through structures.

With HIPS, you leave the investment selection to the index provider. It selects the 15 securities with the highest yields and lowest volatility from all four high-income categories: MLPs, REITs, BDCs and CEFs. All of the securities are equally weighted. It then adjusts the weight of each sector to limit volatility. Each of the four must have at least a 15% weighting; the MLPs cannot exceed 25%.

The index is reconstituted once a year. It rebalances if the MLP weighting at the end of a quarter exceeds 25%. Currently, CEFs account for slightly more than 55% of HIPS's assets. BDCs, REITs and MLPs were each around 15%.

HIPS has maintained a 10.75-cent monthly distribution per unit since inception. And a nice bonus: the ETF doesn't generate a K-1 tax form – something you'd have to deal with if you individually owned any of the partnerships it holds.

* Includes acquired fund fees and other expenses

Learn more about HIPS at the GraniteShares provider site.