Exchange-traded funds (ETFs) have rapidly earned a favored spot among investors thanks to their dirt-cheap diversification. If you want to quickly build a blended portfolio at a low price, it’s hard to do better than ETFs.
Closed-end funds (CEFs), by contrast, are virtually an afterthought, and that’s too bad. Because in many cases – including the three high-yield dynamos I want to show you today – they’re a superior source of quality and raw total-return performance.
What is a closed-end fund exactly? Funnily, it sounds almost like an ETF – it’s a big, pooled investment in numerous securities (stocks, bonds, preferred shares or other assets) that trades on an exchange.
However, while ETFs can add or subtract shares based on demand, a CEF goes public with a fixed number of shares, which occasionally results in the fund trading at a discount or a premium to the net asset value of its investments.
Another critical difference that can lead to vastly dominant returns is CEFs’ ability to use leverage, borrowing money to generate additional value. That’s why it’s possible to see closed-end funds that hold stocks with middling dividends churn out explosive yields in the high single digits.
Why do CEFs sit in the background? Because they tend to be actively managed, which means their expenses are often much higher than what you see in the ETF space. However, while low fees are a key to ETFs’ success, sometimes you get what you pay for – for better and for worse.
Today, I’m going to highlight three closed-end funds that not only offer high-single-digit yields of up to 9.6%, but also outclass their popular exchange-traded counterparts.