Exchange-traded funds, or ETFs, are popular these days, but closed-end funds, or CEFs, can be a great option for investors seeking income as well.
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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.
That’s not to say closed-end funds don’t come with risks, which are often more significant than people realize, says Stash Graham, managing director of Graham Capital Wealth Management. CEFs are “notorious for elevated management fees, which generally impair returns over long-term time horizons.”
These funds often use derivative strategies and leverage to enhance returns. The fact that closed-end funds trade like stocks with the share price a function of supply and demand, rather than net asset value, could also expose investors to the risk of not being able to find a willing buyer or having to sell at a discount when they want to sell.
You’ll want to pay close attention to the size of the fund before investing. “If the fund is too small, it may pose liquidity issues,” says Steven Conners, founder and president of Conners Wealth Management. He gives the example of some smaller closed-end funds that trade under 10,000 to 15,000 shares per day.
“This causes a widening of the buying and selling price in the market,” he says. “Contrast this to some of the larger closed-end funds, and many trade hundreds of thousands of shares each day (and) have typically only a one cent spread between what a buyer or a seller pays.”
It’s also important to read the prospectus before investing and to determine what kind of income is being distributed, says Sander Read, president and CEO of Lyons Wealth Management. CEFs can distribute regular income, dividend income or even K-1 income, all of which are taxed differently.
With that in mind, here are five of the best closed-end funds for income in 2023, according to industry experts:
| Closed-end Fund | Distribution Rate At Market Price |
| Eaton Vance Floating-Rate Income Trust (ticker: EFT) | 11.5% |
| Guggenheim Taxable Municipal Bond & Investment Grade Debt Trust (GBAB) | 10.1% |
| Cohen & Steers Infrastructure Fund (UTF) | 9.5% |
| abrdn Total Dynamic Dividend Fund (AOD) | 7.5% |
| Reaves Utility Income Fund (UTG) | 9.2% |
Eaton Vance Floating-Rate Income Trust (EFT)
The Eaton Vance Floating-Rate Income Trust is a good choice for the current environment thanks to its ability to benefit from rising rates, Conners says.
“When interest rates are on the increase, floating rate funds have a better environment in which to invest, since most maturities in this Eaton Vance closed-end fund are bonds that come due in the nearer term,” he says. The average effective maturity of the bonds in the portfolio is just over four years.
“This should provide comfort as new bonds are being purchased on a regular basis, which is why they have raised the dividend twice this calendar year,” Conners says.
Of course, the reverse is also true: If rates decline, EFT may not be the best choice as new bonds will be purchased at lower rates.
With an 11.5% distribution rate paid monthly and current price that’s 7.6% below its net asset value, EFT is an attractive closed-end fund for income.
[READ: Best Dividend ETFs to Buy Now.]
Guggenheim Taxable Municipal Bond & Investment Grade Debt Trust (GBAB)
If you think over the long-term there will be lower interest rates and higher bond prices, Conners recommends taking a look at the Guggenheim Taxable Municipal Bond & Investment Grade Debt Trust. The fund invests in taxable municipal bonds or “Build America Bonds,” which were introduced under the Obama administration to fund municipalities by the federal government and qualify for federal subsidy payments.
It pays a monthly distribution that equals a rate of just over 10%. One thing to note is that this is a leveraged fund, which can both increase the return and risk for investors.
“This can be a dangerous strategy in years like 2022,” Conners says. “If a fund has 33% of the fund leveraged to purchase more bonds, and the rates on their short-term borrowings increase, it may lead to dividend cuts and a declining share price. This strategy is OK if the closed-end fund has this priced in, and is reflected in its share price, but many saw sharp declines in 2022 when fund families had to reduce their borrowing percentage or pay more in interest to maintain their investment posture.”
GBAB is also an exception to Conners’ general rule of buying at a discount when possible. He says the 3% premium is acceptable, given the fund’s long-term track record.
“If inflation moderates further, and longer term returns to the Fed’s preferred 2% target inflation rate, it will be an attractive entry point at this level,” he says.
Cohen & Steers Infrastructure Fund (UTF)
“The reason one would invest in closed-end funds, especially high yielding closed-end funds, is because many of them are available at bargain basement prices right now,” Read says. Many are trading below NAV and can pay double-digit yields.
The Cohen & Steers Infrastructure closed-end fund almost meets both those criteria with a 9.5% yield and a current price that’s a 3% discount to NAV.
Distributions are paid monthly, and are usually a combination of income, capital gains and a return of capital.
The fund invests in securities issued by infrastructure companies with top holdings, including American utilities company NextEra Energy Inc. (NEE), global transportation company Transurban Group (TRAUF) and real estate investment trust American Tower Corp. (AMT).
About one-third of the portfolio is in the electric sector, followed by corporate bonds at 13%.
abrdn Total Dynamic Dividend Fund (AOD)
The abrdn Total Dynamic Dividend fund is another CEF that caught Read’s eye. With a 15.2% discount to NAV and 7.5% distribution rate, this one is hard to resist. It also has a reasonable expense ratio for a CEF at 1.14% and is considerably less leveraged than some of the other funds on this list at only 4.69%.
AOD lives up to its name by investing in dividend-paying companies while also using a dividend capture strategy. This strategy entails selling a stock on or shortly after the ex-dividend date, the last day you must own shares to receive the dividend, and reinvesting the proceeds into stocks that are expected to pay dividends before the next dividend payment on the sold stock.
As with many CEFs, AOD pays a monthly distribution. In AOD’s case, it’s mostly income or a return of capital being distributed.
Reaves Utility Income Fund (UTG)
Read also likes the Reaves Utility Income fund, despite the fact it’s currently trading at its net asset value. It makes up for this with a 9.2% distribution rate, paid in regular monthly installments of income and capital gains. The fund is moderately leveraged relative to other CEFs at about 22%.
Like UTF above, UTG focuses on infrastructure stocks with an emphasis on utilities companies. Nearly 60% of the portfolio is in utilities companies, though it intends to invest at least 80% of the portfolio in these companies. Top holdings as of June 30, 2023 include American energy companies CMS Energy Corp. (CMS) and Entergy Corp. (ETR), and American utilities company NiSource Inc. (NI).
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5 Best Closed-End Funds for 2023 originally appeared on usnews.com
Update 10/13/23: This story was previously published at an earlier date and has been updated with new information.
