Closed-End Funds (CEFs)

Closed-End Funds (CEFs) are a type of investment fund that pools money from investors to buy a diversified portfolio of assets, such as stocks, bonds, real estate, or other securities. 

Unlike mutual funds or ETFs (exchange-traded funds), CEFs have a fixed number of shares issued at their initial public offering (IPO) and are traded on stock exchanges like individual stocks.

Key Takeaways – Closed-End Funds (CEFs)

• High Yields – CEFs often deliver strong income, with average yields around 8-9%, and some exceeding 12%. This is attractive for market participants with an income orientation, as the yields are beyond traditional ETFs or index funds.
• Discount Opportunities – Many CEFs trade below their net asset value (NAV), which lets investors buy high-quality assets, like blue-chip stocks, at a discount.
• Diverse Asset Exposure – CEFs offer access to various asset classes, including stocks, bonds, REITs, and convertible securities, for better portfolio diversification.
• Active Management – CEFs are actively managed, allowing portfolio managers to make tactical moves for higher returns, unlike passively managed ETFs.
• Leverage for Income – Many CEFs use leverage (borrowed funds) to amplify income potential, making them an intriguing choice for generating cash flow.
• Not a Great Fit for Trading – They’re designed for longer-term holds rather than shorter-term trading.

Key Features of CEFs

Here are the key features of CEFs:

Fixed Share Count

After the IPO, the number of shares remains constant, and investors buy or sell these shares on the open market, rather than directly from the fund.

Trading at Premiums or Discounts

The price of CEF shares often differs from their net asset value (NAV) – the value of the fund’s holdings divided by the number of shares. 

Shares may trade at a premium (above NAV) or a discount (below NAV), depending on market demand and overall “sentiment.”

Active Management

Most CEFs are actively managed, meaning professional portfolio managers make strategic decisions about which assets to buy, sell, or hold.

This can provide opportunities for greater returns compared to passive funds like ETFs.

High Income Potential

CEFs are known for their strong income generation.

They often use strategies like leveraging (borrowing to invest) to increase returns, enabling them to pay higher dividends than other types of funds.

Diverse Asset Exposure

CEFs can invest in a wide range of asset classes, including equities, corporate bonds, municipal bonds, real estate investment trusts (REITs), and more.

This makes them a versatile tool for portfolio diversification.

Liquidity

Since CEFs trade on public exchanges, they offer daily liquidity, allowing investors to buy or sell shares during market hours.

Still Relatively Unpopular

Many might find it surprising more people aren’t aware of CEFs and the high-income opportunities they can provide a variety of benefits and features.

Diversification Potential

CEFs offer diversification across and beyond equities.

Among the 500+ funds available, you’ll find those focused on stocks, corporate bonds, municipal bonds, REITs, and other asset classes.

This variety enables investors to tailor their portfolios for specific goals or risk tolerances.

Can Trade Below NAV

CEFs often trade below net asset value (NAV), letting you buy stocks like Apple (AAPL) at a discount.

This kind of opportunity is virtually nonexistent with ETFs, which usually trade close to their NAV.

(Arbitrageurs typically will arb away price discrepancies quickly.)

Income

One of the most attractive features of CEFs is their income potential. 

On average, CEFs typically yield 7-9% – which is quite a contrast to the meager payouts of most S&P 500 stocks, which average just 1-2%.

Many value the discount-to-NAV feature the most, but others prioritize the income potential. 

Markets can move around a lot and the income distributions provide a level of predictability.

Effects on Retirement Planning

With such high yields, CEFs can transform retirement planning. 

For instance, a middle-class salary can be recreated with significantly less savings compared to traditional index funds.

This could effectively take years off the time needed to achieve financial independence.

For example, to generate $100,000 in annual income, you’d need to save over $5 million if relying on the S&P 500’s average historical dividend yield (though, of course, with the S&P 500 you’re mostly banking on appreciation for most of the returns, not the dividends). 

There are also times in its history where the dividend yield of SPY is closer to 1% than 2%.

Even a high-dividend ETF like SPYD, with its typical 4%-5% yield (due to the majority of its holdings in dividend-heavy financial services, utilities, and real estate), requires $2-$2.5 million. 

But with the typical CEF yield, you’d only need to save somewhere around half of that.

The math gets even better with some CEFs yielding 12%. 

At that rate, every $100,000 invested generates around $1,000 per month. 

Of course, this is all assuming the yields are sustainable.

And CEFs don’t just deliver yield, but also can diversify your portfolio more effectively than some traditional options, offering exposure to asset classes like real estate, municipal bonds, and convertible securities.

Example CEFs

Let’s look at three example CEFs that deliver impressive yields and diversification.

(Please check the current yields and other factors mentioned for the latest up-to-date information.)

CEF #1 (GUT): A 11.5% Yield Powered by Utilities

The Gabelli Utility Trust (GUT) is a reliable income generator, with a 12% yield supported by a portfolio of top-tier utility companies like Duke Energy (DUK) and NextEra Energy (NEE).

Essentially, owning GUT gives you a slice of the stable revenue from utility bills across the US.

Since its inception in the 1990s, GUT has consistently delivered high payouts. It’s even issued special dividends in the past, though it focuses on maintaining a steady income stream.

That said, GUT trades at a steep premium – currently 53% – which might deter short-term investors.

For a more attractively priced option, let’s move to the next fund.

CEF #2 (AVK): 11.8% Yield

The Advent Convertible and Income Fund (AVK) combines the stability of bonds with the growth potential of equities.

Its convertible bonds can be exchanged for stock when conditions are favorable, adding a capital-gains kicker to its already strong 12.3% yield.

AVK also sometimes trades at a discount to NAV.

This undervaluation creates an opportunity for both income and potential capital gains as the discount narrows.

CEF #3 (PAXS): An 11.4%-Yielding Bond-Focused Fund

PAXS, a PIMCO-managed fund, offers an 11.3% yield from a portfolio of over 300 high-yield corporate bonds.

Known for its management, PIMCO consistently identifies undervalued bonds and navigates interest-rate changes with precision.

Beyond These

Beyond these three funds, there’s a wealth of CEFs offering similar yields and discounts.

With their ability to combine high income, diversification, and potential capital gains, CEFs can help you reach financial independence faster — potentially shaving years off your retirement timeline.

We have some more below.

Equity Focused

Covered Call/Option Strategy CEFs

• Eaton Vance Tax-Managed Buy-Write Income Fund (ETB) – This fund writes (sells) call options on a significant portion of its portfolio, generating income from premiums. This strategy can be most advantageous in sideways or slightly declining markets.
• BlackRock Enhanced Equity Dividend Trust (BDJ) – Similar to ETB, BDJ uses a covered call strategy but may have a slightly different approach to security selection or option writing.

Dividend-Focused CEFs

• John Hancock Tax-Advantaged Dividend Income Fund (HTD) – This fund focuses on high-quality dividend-paying stocks, often with a focus on sectors like utilities and REITs. It aims to provide a consistent stream of tax-advantaged income.
• Nuveen Select Tax-Free Income Portfolio (NXP) – While technically holding municipal bonds which generate tax-free income, this CEF holds assets that pay out high dividends to investors, similar to a dividend focused CEF.
• DNP Select Income Fund Inc. (DNP) – This fund primarily invests in public utility companies, including electric, gas, water, and telecommunications. These sectors often feature stable cash flows and higher dividend payouts. While not explicitly “tax-advantaged,” DNP tries to distribute income efficiently, often resulting in a portion being classified as qualified dividends, taxed at lower rates. They also try to minimize short-term capital gains, which are taxed as ordinary income.
• Eaton Vance Tax-Advantaged Global Dividend Income Fund (ETG) – This fund invests in a global portfolio of dividend-paying stocks, providing diversification beyond the US. ETG’s distributions can include qualified dividends (taxed at lower rates), and a portion of foreign dividends may qualify for a foreign tax credit, potentially reducing your overall tax burden. They also have a tax-managed strategy to minimize taxes.
• Cohen & Steers Quality Income Realty Fund (RQI) – This fund focuses on high-quality real estate investment trusts across various property sectors. REITs are required to distribute a significant portion of their taxable income as dividends. REIT dividends are typically a mix of ordinary income, capital gains, and return of capital (which is not taxed immediately but reduces your cost basis). RQI is known for generating a high level of qualified dividend income.

Fixed Income Focused

High-Yield Bond CEFs (Beyond PAXS)

• BlackRock Corporate High Yield Fund, Inc. (HYT) – This fund invests in a diversified portfolio of high-yield (below investment grade) corporate bonds, aiming for high income.
• MFS Intermediate High Income Fund (CIF) – This fund looks to provide high current income by investing in a diversified portfolio of below-investment-grade fixed income instruments. These instruments may include corporate bonds, senior secured loans, mortgage-backed securities, and other asset-backed securities. MFS applies a bottom-up, fundamental approach to credit selection, with a focus on identifying undervalued securities while also considering the macroeconomic outlook.
• Credit Suisse High Yield Bond Fund (DHY) – Similar to HYT, DHY focuses on high-yield bonds, often with a global approach.
• PGIM High Yield Bond Fund, Inc. (ISD) – This fund tries to maximize current income by investing primarily in a diversified portfolio of high-yield corporate bonds rated below investment grade. PGIM, the fund’s manager, uses a disciplined credit research process to identify attractive opportunities while managing risk. The fund may also invest in other fixed-income instruments and derivatives to improve income or manage interest rate sensitivity.

Senior Loan CEFs

• Invesco Senior Income Trust (VVR) – Senior loans are floating-rate loans, meaning their interest payments adjust with changes in prevailing interest rates. This can be beneficial in a rising rate environment.
• Nuveen Credit Strategies Income Fund (JQC) – JQC invests in a diversified portfolio of senior loans, and also invests in other income-producing assets, like high-yield bonds and some structured credit.

Mortgage-Backed Securities CEFs

• Western Asset Mortgage Defined Opportunity Fund Inc (DMO) – Invests primarily in non-agency residential mortgage-backed securities (RMBS) and some commercial mortgage-backed securities (CMBS). These aren’t guaranteed by government agencies like Fannie Mae or Freddie Mac, so they tend to offer higher yields.
• DoubleLine Income Solutions Fund (DSL) – Similar to DMO, DSL invests in mortgage-related assets, but it can also have exposure to other fixed-income sectors.

Specialty CEFs

Real Estate CEFs (Beyond REIT focus)

• Cohen & Steers Infrastructure Fund, Inc (UTF) – This fund invests in companies that own and operate infrastructure assets globally, such as utilities, toll roads, and airports. These assets often have predictable cash flows.
• CBRE Clarion Global Real Estate Income Fund (IGR) – This fund invests in a wide array of assets, including real estate securities, bonds, and derivatives.

Convertible Bond CEFs (Beyond AVK)

• Calamos Convertible and High Income Fund (CHY) – Similar to AVK, CHY combines convertible bonds with high-yield bonds, providing a mix of income and potential capital appreciation.

Emerging Market CEFs

• Templeton Emerging Markets Income Fund (TEI) – This fund invests primarily in fixed-income securities issued by governments and companies in emerging market countries. These markets can offer higher yields but also come with greater risk.
• Morgan Stanley Emerging Markets Domestic Debt Fund (EDD) – Similar to TEI, EDD focuses on emerging market debt but has a specific emphasis on debt denominated in local currencies. This helps reduce domestic currency exposure.

Preferred Stock CEFs

• Flaherty & Crumrine Preferred Securities Income Fund Inc. (FFC) – This fund invests in preferred stocks, which are hybrid securities that have characteristics of both stocks and bonds. Preferred shares typically offer higher yields than common stocks and have a higher claim on assets in case of liquidation.
• John Hancock Premium Dividend Fund (PDT) – While also investing in common stocks, PDT has a large allocation to preferred shares, looking to provide a high level of income.

Other Factors

Risk

Remember that CEFs, especially those with leverage or those focused on high-yield or emerging markets, can be more volatile than traditional mutual funds or ETFs.

They’re also less liquid and much less amenable to trading activities.

Management Fees

CEFs tend to have higher management fees than passively managed ETFs, given their active management.

Discount/Premium

Always consider the current discount or premium to NAV and its historical trend before investing in a CEF.