6 Best-Paying Closed-End Funds for 2023

Closed-end funds track a variety of assets, including stocks, bonds and crypto.

Exchange-traded funds, or ETFs, are very popular these days, but closed-ended funds, or CEFs, can be a great option as well. Like stocks, CEFs debut via an initial public offering, or IPO, where the fund manager issues a fixed quantity of shares. These shares can track a variety of underlying assets, including equities, fixed income, commodities and even cryptocurrencies. Once issued, the shares then trade on the secondary market between individual investors. However, unlike ETFs, CEFs will not accept additional inflows of capital or issue new shares after the IPO. Therefore, depending on supply and demand, the share price of a CEF can diverge from its net asset value, or NAV, and trade at a premium or a discount. Like ETFs, CEFs also make periodic distributions, which can consist of dividends, ordinary income, capital gains and return of capital. Here are five of the best-paying closed-end funds to buy for 2023 — and one fund trading at a juicy discount.

PIMCO Dynamic Income Fund (ticker: PDI)

Pimco is well known for its suite of actively managed fixed-income investments, with PDI being a great example. The fund invests in a highly diversified pool of securities with a focus on income generation. Unlike index funds, PDI isn’t restricted to certain issuers, geographies or credit qualities. The fund is free to seek income opportunities as they arise, with underlying assets comprised of everything from mortgage-backed securities, investment-grade and high-yield corporate bonds, and emerging-market corporate and government bonds. Since its inception in 2013, PDI has an annualized 10.3% total return with distributions reinvested. Currently, PDI’s distribution rate based on its NAV stands at 14.3%, so the fund is best held in a tax-advantaged account. The fund’s total expense ratio stands at 2.64%, or $264 per $10,000 invested.

KKR Income Opportunities Fund (KIO)

Investors looking for consistent, higher-than-average monthly income can buy KIO, which invests primarily in leveraged bank loans and high-yield corporate bonds. As of Nov. 18, 2022, the fund trades at $11.45 per share and pays a monthly dividend per share of 10.5 cents. Much of KIO consists of below-investment-grade debt. With 25.3% of the portfolio rated CCC and 20.7% rated CCC+ by Standard & Poor’s, the credit risk posed by KIO is higher than your average corporate bond fund, but the fund compensates for that with a higher yield-to-maturity of 22.7%, which is the weighted-average yield of all the underlying bonds if held to maturity. Right now, KIO trades at a 9.1% discount to NAV, so investors can get shares that are on sale relative to their intrinsic value. Holding shares of KIO will cost you an expense ratio of 2.65%.

BlackRock Resources & Commodities Strategy Trust (BCX)

Investors looking for a combination of higher-than-average yields and inflation protection might like BCX. This fund primarily invests in energy, mining and agriculture companies with significant natural resource and commodity exposure to hedge against inflation. Then, the fund deploys an options writing strategy, selling covered calls to enhance monthly income. Top holdings in BCX include U.S. energy companies Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX), as well as U.K.-based majors Shell PLC (SHEL) and BP PLC (BP). There’s also a smattering of other stocks from Canada, France, Norway and Finland. BCX’s distribution rate stands at 6.5%, which is the hypothetical annual yield an investor would receive if the most recent distribution and the fund’s price stayed consistent moving forward. The fund is up about 8% in 2022 through Nov. 18, and currently trades at a discount to NAV of 13.9%. BCX charges a gross expense ratio of 1.07%.

John Hancock Tax-Advantaged Dividend Income Fund (HTD)

Investors looking for tax-efficient income can consider HTD, which focuses on domestic dividend stocks that potentially qualify for the more favorable long-term capital gains tax rate. HTD primarily holds preferred and common shares of utilities companies, traditionally regarded as an income-oriented and defensive sector of the U.S. market. Utility sector stocks make up 59.2% of HTD’s underlying assets, with financial (25.1%) and energy (9.8%) sector stocks coming in second and third, respectively. HTD’s distribution rate based on its share price is 7.4%, with the fund trading at a 2.1% discount to NAV. HTD has a gross expense ratio of 1.56%.

Nuveen S&P 500 Dynamic Overwrite Fund (SPXX)

Investors looking to track the S&P 500 but with lower volatility and higher income potential can consider SPXX. This fund uses an option buy-write strategy, which consists of buying the stocks in the S&P 500 and then selling covered calls on 35% to 75% of the portfolio, with a long-term target of 55%. Thus, the fund converts its future upside potential into an immediate cash premium, which is paid out as monthly income. A covered call strategy can lower volatility and reduce some downside risk but will also cap returns during bull markets. The fund pays a distribution rate of 6.8% based on its market price and 7.7% based on its NAV. As of Nov. 18, SPXX’s share price is down 1.7% in 2022, while its NAV is down 15.1%. High investor demand for covered call strategies this year caused the fund to trade at a 12.5% premium to NAV.

Grayscale Bitcoin Trust (GBTC)

GBTC is the lone exception on this list: It doesn’t pay a distribution, but it trades at an extreme discount to NAV, which makes it worth consideration for opportunistic investors. One of the most unique CEFs in the world due to its cryptocurrency focus, the fund holds physical bitcoin (BTC) in offline cold storage, unlike some ETFs that gain bitcoin exposure via futures contracts. Currently, GBTC has assets under management, or AUM, of over $10 billion thanks to its popularity among institutional investors. With approximately 692 million shares outstanding, each share of GBTC corresponds to a fraction of a bitcoin. Currently, the fund is trading at a 45% discount to NAV due to selling pressure. As firms like Voyager, Celsius and now FTX fall, investors in GBTC have flocked to sell shares, driving the price down. Still, if you believe in an eventual crypto rebound, the 45% discount to NAV could be a good entry point. GBTC charges an annual fee of 2%.

6 of the best closed-end funds for 2023:

— PIMCO Dynamic Income Fund (PDI)

— KKR Income Opportunities Fund (KIO)

— BlackRock Resources & Commodities Strategy Trust (BCX)

— John Hancock Tax-Advantaged Dividend Income Fund (HTD)

— Nuveen S&P 500 Dynamic Overwrite Fund (SPXX)

— Grayscale Bitcoin Trust (GBTC)

More from U.S. News

9 High-Yield Dividend Stocks to Buy

9 of the Best Small-Cap Stocks to Buy for 2023

7 Best Small-Cap Tech Stocks to Buy

6 Best-Paying Closed-End Funds for 2023 originally appeared on usnews.com

Update 11/21/22: This story was published at an earlier date and has been updated with new information.

Federal News Network Logo
Log in to your WTOP account for notifications and alerts customized for you.

Sign up