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.
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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. They can have high management fees that erode returns and use derivative strategies that increase complexity.
The fact that closed-end funds trade like stocks with the share price a function of supply and demand, rather than NAV, 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* |
| Guggenheim Taxable Municipal Bond & Investment Grade Debt Trust (ticker: GBAB) | 9.5% |
| Ecofin Sustainable and Social Impact Term Fund (TEAF) | 9.4% |
| Eaton Vance Tax-Advantaged Global Dividend Income Fund (ETG) | 8.4% |
| Eaton Vance Enhanced Equity Income (EOI) | 8.4% |
| Nuveen S&P 500 Buy-Write Income (BXMX) | 7.2% |
*As of June 25.
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 9.5% 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 23%) 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 nearly 2% 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 more than 21% discount, you can feel confident you’re getting a good deal here.
The problem with CEFs that trade at steep discounts is that they may not come out of the discount rut by the time you want to sell. Finite term CEFs resolve this issue by establishing dates at which they will liquidate. TEAF is designed to liquidate 12 years from the effective date of its initial registration statement, which will happen by the end of the decade. 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.
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.
[read: 7 of the Best 5-Star ETFs to Buy]
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 Google’s parent company, Alphabet Inc. (GOOG), along with a mix of investment- and noninvestment-grade debt.
It pays a monthly distribution at a current rate of 8.4% and is trading at over an 11% discount to NAV.
Eaton Vance Enhanced Equity Income (EOI)
If interest rates do drop in 2024, funds with an income focus could be helpful in bolstering returns. One such fund is the Eaton Vance Enhanced Equity Income, which focuses on income first and capital appreciation second. It accomplishes this by investing in mid- and large-cap stocks the managers believe have above-average financial strength and growth.
EOI holds 56 stocks, including the all-too-familiar Microsoft, Nvidia Corp. (NVDA) and Apple. These are paired with covered calls written on the stocks in the portfolio to generate extra income with minimal additional risk.
It pays a monthly distribution, but should be noted that this is categorized as ordinary income for federal tax purposes. So it may be best to hold this in a tax-advantaged account.
Nuveen S&P 500 Buy-Write Income (BXMX)
BXMX is a good buy right now, according to Ron Tallou, founder and owner of Tallou Financial Services. It’s currently trading at a discount of nearly 11% with an average discount over the past six months of nearly 10%.
“For all the S&P 500 lovers, this closed-end fund gives investors the opportunity to participate in the index with less volatility,” Tallou says. It aims to replicate the S&P 500’s price while selling call options on the stock in the portfolio to reduce portfolio risk. These call options also generate additional income for the fund.
“The minimized risk can be observed in a down year like 2022,” Tallou says. When the S&P 500 dropped almost 19% that year, BXMX dropped only 7%.
The downside to downside appreciation is that it tends to minimize the upside, too. BXMX tends to return less than the S&P 500 in good years. The S&P’s 10-year average return is 10.8% compared to 7.4% for BXMX. But you also get a 7% distribution rate with BXMX, which is “more than the majority of S&P 500 mutual funds and ETFs that you will find on the open market,” Tallou points out.
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5 Best Closed-End Funds for 2024 originally appeared on usnews.com
Update 06/26/24: This story was published at an earlier date and has been updated with new information.
