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.
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.
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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. “We prefer to stay away from those higher-risk CEFs, as the relative value of the preferred stock of a CEF that invests in more traditional publicly traded fixed income is very good right now,” Graham says. He likes to buy preferred shares instead of common shares of CEFs to “reduce broader market and credit risk compared to investing in the common stock,” he says.
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.
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 1-cent spread between what a buyer or a seller pays.”
With that in mind, here are five of the best closed-end funds to buy in 2024:
| Closed-end fund | Distribution rate at market price as of Dec. 14 |
| Eaton Vance Floating-Rate Income Trust (ticker: EFT) | 11.2% |
| Guggenheim Taxable Municipal Bond & Investment Grade Debt Trust (GBAB) | 10.2% |
| Ecofin Sustainable and Social Impact Term Fund (TEAF) | 9.4% |
| Eaton Vance Tax-Advantaged Global Dividend Income Fund (ETG) | 8% |
| MFS Investment Grade Municipal Trust (CXH) | 3.6% |
Eaton Vance Floating-Rate Income Trust (EFT)
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 the dividend has increased several times 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 11.2% distribution rate paid monthly and a current price that’s 6% below its net asset value as of Dec. 14, EFT is an attractive closed-end fund for income.
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 has invested in taxable municipal bonds and Build America Bonds, which were introduced under the Obama administration to finance state and municipal infrastructure projects with federally subsidized interest rates.
It pays a monthly distribution that equals a rate of 10.2% based on its current market price. 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 (nearly 30%) 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 roughly 3% premium to NAV 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.
Ecofin Sustainable and Social Impact Term Fund (TEAF)
If you prefer to abide by the buying-at-a-discount rule, TEAF may be the closed-end fund for you in 2024. Currently trading at a 20% discount, you can feel confident you’re getting a good deal here.
What’s more, TEAF is designed to liquidate 12 years from the effective date of its initial registration statement, which will happen less than a decade from now. The board of directors may vote to extend TEAF’s life by one more year, but investors are guaranteed their money back by the 13th year. A fund with a finite life may not sound like a good investment, but since the fund will liquidate at NAV, this could translate into tidy gains for discount shoppers.
In the meantime, TEAF pays a monthly distribution at a rate of 9.4%. And it comes with the added bonus of social responsibility in that it seeks to make a positive social, environmental and economic impact through the companies it invests in.
Eaton Vance Tax-Advantaged Global Dividend Income Fund (ETG)
A downside with income-producing investments can be the tax bill that comes with them. With CEFs, this can get particularly painful, as you may get distributions from a variety of sources within the fund, each of which is taxed differently.
The Eaton Vance Tax-Advantaged Global Dividend Income Fund aims to make this aspect of your life easier by providing income that qualifies for the lower long-term capital gains federal tax rate. Currently, that means holding familiar dividend-paying names like Microsoft Corp. (MSFT) and Apple Inc. (AAPL), along with a mix of investment- and non-investment-grade debt.
It pays a monthly distribution at a current rate of 8% and is trading at a 12% discount to NAV.
MFS Investment Grade Municipal Trust (CXH)
“CXH is an interesting situation for an investor looking for federally tax-free income and willing to take some interest rate risk alongside some of the great CEF investors in the world,” Graham says.
As the name suggests, CXH invests in municipal bonds that are exempt from federal income taxes — though they may still be subject to the alternative minimum tax. It pays a monthly dividend yield of 3.6%, which is a bit lower than other funds on this list, but the yield isn’t what intrigues Graham about the fund the most.
Over the summer, CXH announced an agreement with CEF investor Bulldog Investors, wherein the fund will buy back up to 10% of the outstanding shares at a minimum of 98% of NAV, allowing CEF investors to vote to liquidate the fund at the 2025 annual shareholder meeting.
“The opportunity is intriguing because you collect a federal tax-free dividend paid monthly, (and) if interest rates continue to fall, the NAV of the fund will increase,” benefiting CXH shareholders, Graham says. “Finally, coming into the summer of 2025, you have favorable odds that shareholders will vote to liquidate the CEF, and you can realize a good majority of the difference between the stock price and NAV.”
The fund can be a bit thinly traded, however, so Graham recommends limit orders — where you set a price you’re willing to pay or receive — to ensure you aren’t a victim of wide bid-ask spreads.
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5 Best Closed-End Funds for 2024 originally appeared on usnews.com
Update 12/15/23: This story was published at an earlier date and has been updated with new information.
