If you’re looking for the best closed-end funds (CEFs) to buy, it helps if you understand what they are and aren’t. They are similar to initial public offerings (IPOs) in that an amount of capital is raised at the launch. The portfolio managers responsible for the closed-end fund then invest the funds.
CEFs resemble an investment company more closely than an open-end mutual fund or exchange-traded fund (ETF). They are called closed-end funds because once they raise funds through an IPO, they are closed to new capital with a few exceptions, and they trade like stocks on U.S. exchanges.
If a closed-end fund uses leverage, it can issue debt and preferred shares to grow the asset base. In addition, it can make a secondary share offering to raise additional equity.
A big reason for investing in this type of product is that there are many closed-end funds with significant discounts at any given time. Here are three to consider for your portfolio.
| YYY | Amplify High Income ET | $11.738.15 |
| ECAT | BlackRock ESG Capital Allocation Term Trust | $15.34 |
| AOD | Abrdn Total Dynamic Dividend Fund | $8.15 |
Amplify High Income ETF (YYY)
Amplify High Income ETF (NYSEARCA:YYY) is a fund-of-CEF-funds. It tracks the performance of the ISE High Income Index, a collection of 45 CEFs that are ranked based on their yield, discount to net asset value (NAV), and liquidity. Reconstituted and rebalanced in January and July, no index constituent may exceed an initial 3% weighting.
YYY currently pays a monthly distribution of 12 cents a share. The annual rate of $1.44 yields 12.4%. As of March 31, the CEF traded at an 8.86% discount to its NAV. In 2022, it sold at a premium 60% of the time.
As CEFs go, YYY is dominated by bonds, which account for 83% of its $345.3 million in net assets. As a result, the fund is focused on income generation rather than capital gains. Since its inception in June 2013, the fund has achieved an annualized total return of 4.1% on its NAV, 39 basis points higher than its index benchmark.
The top three CEF providers in the fund of closed-end funds are Nuveen (20% of assets), Pimco (18%) and Franklin-Templeton (10%).
YYY has a high total expense ratio of 2.72%. However, 2.22% of the total is for acquired fund fees from the 45 CEFs included in the portfolio. So you’d have to pay these fees if you bought all 45 CEFs without YYY.
BlackRock ESG Capital Allocation Term Trust (ECAT)
The BlackRock ESG Capital Allocation Term Trust (NYSE:ECAT) is considerably larger than YYY, with net assets of $1.8 billion. It is an actively managed fund that can invest in public and private markets across different asset classes.
“We believe that a generational shift toward sustainable practices, coupled with a large reallocation of capital towards ESG, presents a long-term investment trend. ECAT’s closed-end structure allows the management team to identify, what it believes to be advantageous capital appreciation and opportunities from around the globe,” states its Q4 2022 update.
The breakdown between equity and fixed income is 66.5% and 42.5%, respectively, with -8.91% in cash, representing the CEF’s use of leverage.
The top three weightings by geography are North American equities (45%), North American fixed income (38.5%) and European equities (17.7%). The top three weightings by sector are technology (16.2%), health care (13.2%) and consumer discretionary (8.7%).
ECAT currently trades at a nearly 12% discount to its NAV. Charging 1.33% in fees, the fund launched in September 2021. It has 373 equity and fixed-income holdings. One of the top 10 equity positions is LVMH (OTCMKTS:LVMUY), one of my favorite global stocks.
Abrdn Total Dynamic Dividend Fund (AOD)
Abrdn Total Dynamic Dividend Fund’s (NYSE:AOD) primary investment objective is to generate high amounts of dividend income with a secondary goal of capital appreciation.
The actively managed fund has $990.7 million in net assets, charges 1.14% annually, has a monthly distribution of $0.0575 per share, and trades at a 13.9% discount to its $9.48 NAV.
Return of capital hasn’t been discussed yet in this article. CEFs routinely return shareholders’ initial capital to ensure consistent monthly distributions. Return capital is not taxable. However, it reduces your cost basis, so your taxable capital gains will be higher when you sell. So consider it a form of tax deferral. That’s good, especially if you’re in a higher tax bracket.
In the case of AOD, 47% of the latest monthly distribution came from net investment income, while the return of capital accounted for the remaining 53%.
As for the assets held by AOD, except for cash, they are entirely equity holdings — 92 to be exact, with the top 10 holdings accounting for 17.7% of the portfolio. The top three sectors by weighting are technology (18%), financials (15.7%) and health care (11.6%). The U.S. accounts for 56.4% of the net assets, with no other country having a double-digit weighting.
Over the past 10 years through Feb. 28, the annualized NAV total return after fees is 8.35%, 42 basis points higher than its benchmark, the MSCI All Country World Index.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
