Closed-end funds, or CEFs, have been around for quite some time. They were below the radar, though, because until the Federal Reserve killed bond yields, most investors just hunted for yield in bonds. However, with bond yields so low, investors were pushed further out onto the risk curve.
And there they found CEFs.
Closed-end funds raise money via an IPO. That capital then gets invested based on what the managers set out in a prospectus. As opposed to mutual funds, which can be bought and sold only at day’s end, and for which share counts are open-ended, CEFs behave much more like stocks.
I’ve been examining CEFs closely recently, as they often have very generous distribution yields and I plan to add some to my stock advisory newsletter, The Liberty Portfolio. CEFs can be a good way to diversify your portfolio’s risk while maintaining higher income payments.
I’ve cobbled together three very different CEFs just to give you an idea of the vast choice that is in the CEF market.
Closed-End Funds to Buy: Eaton Vance Risk-Managed Diversified Equity Fund (ETJ)
Eaton Vance Risk-Managed Diversified Equity Inc Fund (NYSE:ETJ) offers a risk-abatement strategy for those with a very long-term horizon. The risk is managed in this fund because its strategy is to sell covered calls against quality equities. Selling covered calls is an options strategy. The manager sells the right to another investor to “call,” or have sold to him, a stock at or above a given price on or before an expiration date.
The fund earns money by purchasing familiar large-cap names and pocketing the money the fund receives for selling the calls, as well as any capital gains it may earn along the way.
Over the past twelve months, the distribution rate has been 10.9%, with fund expenses of 1.11%.
Closed-End Funds to Buy: Nuveen Diversified Dividend & Income Fund (JDD)
Nuveen Diversified Dividend & Income Fund (NYSE:JDD) takes a multi-pronged approach to generating gains. First, it is leveraged. So it borrows funds equal to about 30% of the value of the fund. It then buys up both equity and debt, with the intent to smooth out interest rate sensitivity.
The word “diversified” is appropriate, as JDD owns 41% of its value in real estate investment trusts, some 30% in your typical dividend equity, 35% in emerging market debt and international corporate debt and about 33% in senior floating rate securities.
That gives it both domestic and international holdings, ranging from high yield corporate debt to debt with senior positions in the capital stack, along with the REITs and stocks.
It yields about 8.6%.
Closed-End Funds to Buy: Nuveen Texas Quality Municipal Income Fund (NTX)
Conservative investors may want to look at Nuveen Texas Quality Municipal Income Fund (NYSE:NTX). In this case, the fund’s name tells you that it’s all about Texas muni bonds. The fund holds about 15% in GTO bonds, 15% in transportation bonds, 14% in U.S. guaranteed securities and the rest is spread across water and sewer, utilities, education, healthcare and housing bonds.
Roughly 90% of the fund’s bonds are rated A or higher, and 32% are rated AAA.
Its ten-year average annual total return is a very respectable 6%. The distribution rate is a comparably small 4.3%, but, again, you’re in a fund with very highly rated obligations, spread across about 150 different holdings, in a state that has generally well-managed fiscal operators.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 22 years’ experience in the stock market and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at [email protected].