First things first: A closed end fund is similar to a mutual fund, as it is a professionally managed portfolio of stocks, bonds or other investments.
However, mutual funds actively issue new shares and redeem outstanding shares, while closed end funds issue a specific number of shares at their inception … and shares of the closed end fund then are traded on an exchange. That means shares in closed end funds can trade at either at a discount or premium when compared to the value of the underlying assets.
One key advantage of closed end funds is that they often pay high distribution rates, typically on a quarterly or even monthly basis. Of course, it’s important to distinguish between distribution rates and returns, because a closed end fund’s distribution rate can include dividends, capital gains or even a return of capital.
A closed end fund also may use leverage to increase distributions, usually by playing the spread between short- and long-term interest rates. So investors need to do their homework before jumping into a closed end funds.
That said, here are five great closed end funds investors should consider in today’s low-interest-rate environment:
Closed End Fund #1: Nuveen Dividend Advantage Municipal Fund
Distribution Rate: 6.8%
Expense Ratio: 1.93%
The first closed end fund for investors to consider is the Nuveen Dividend Advantage Municipal Fund (NAD). This closed end fund focuses on a diversified portfolio of tax-advantaged municipal bonds issued by U.S. state and local government entities.
NAD is managed by Nuveen’s munibond expert, Thomas C. Spalding Jr., CFA. He has been with Nuveen for almost four decades and started Nuveen’s first closed end fund in 1987.
This particular municipal closed end fund is currently trading at a discount of nearly 10%. It also has a solid current distribution rate of 6.8%, along with leverage of 37%. Including interest expense from that leverage, the total expense ratio is 1.9% for common shares.
This closed end fund is down 12% year-to-date, but those who keep an eye on historical performance of managers should note its five-year return north of 10%.
Closed End Fund #2: Gabelli Equity Trust
Distribution Rate: 8%
Expense Ratio: 1.42%
Gabelli Equity Trust (GAB) is another good option in the world of closed end funds.
GAB invests mainly in common stocks and other equity securities, with an eye toward value. Top holdings in the closed end fund include American Express (AXP), Rollins (ROL), Honeywell International (HON) and Deere (DE).
The closed end fund is managed by investment guru Mario Gabelli — the founder, chairman and CEO of Gabelli Asset Management, and a manager with a long and strong track record of long-term capital growth.
Shares of this closed end fund aren’t currently selling at a discount, but assets of $1.6 billion, a sweet current distribution rate of 8.1% and a relatively cheap total expense ratio of 1.42% are all things to like about GAB.
GAB is up a whopping 33% year-to-date and has a five-year return of 23%.
Closed End Fund #3: H&Q Healthcare Investors Common
Distribution Rate: 7.3%
Expense Ratio: 1.32%
Next up, Tekla Capital Management’s H&Q Healthcare Investors Common (HQH) is another solid closed end fund, although it differs from the first two in that it is non-leveraged.
With Obamacare front and center in the national psyche, it makes sense to look to the healthcare sector for growth opportunities. This closed end fund aims to invest 80% of its assets in health services and medical technology companies and current holdings include some the biggest names in biopharma: Gilead Sciences (GILD), Celgene (CELG), Regeneron Pharmaceuticals (REGN) and Biogen (BIIB).
Plus, the closed end fund manager is Daniel Omstead. He is the CEO of Tekla Capital Management, and also formerly headed a development stage biotech company.
This closed end fund has $663 million in assets, a distribution rate of 7.3% and decent expense ratio of 1.32%. Also, the closed end fund boasts a year-to-date return of a whopping 47%, and a five-year return of 23%.
Closed End Fund #4: AllianceBernstein Income Fund
Distribution Rate: 5.9%
Expense Ratio: 0.58%
Another solid option is the AllianceBernstein Income Fund (ACG). If you like size and safety (and are willing to roll with more subdued returns), this closed end fund is a good bet.
The ACG closed end fund invests principally in U.S. government bonds, with assets around $2 billion. One of the big benefits here, however, is that ACG is trading at a 14% discount to its underlying assets — kind of like getting a sale on Treasuries.
The fund is adeptly managed by Paul DeNoon, Alliance Bernstein’s SVP and director of emerging market debt. It has a distribution rate of 5.9%, while its 0.58% expense ratio last year was the lowest in the closed end fund peer group .
Year-to-date, ACG is down 8%, but the closed end fund has returned over 9% per year since inception.
One thing to note: It is leveraged at 47% — the highest on this list.
Closed End Fund #5: Source Capital
Distribution Rate: 4.7%
Expense Ratio: 0.86%
This final closed end fund is another non-leveraged option. Source Capital (SOR) has assets of $511 million, and the closed end fund invests primarily in equity and equity-related investments. It is managed by the savvy Rich Atwood, FPA’s managing partner and chief operating officer.
Plus, the SOR closed end fund is trading at a discount of nearly 10% and has a reasonable total expense ratio of 0.93%.
The total distribution rate of 4.7% is lower than other names on this list, but the closed end fund has steady returns to make up for that. SOR has climbed 22% year-to-date, and 29% over the last year.
As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.