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Closed-End Funds (CEFs) are
similar to exchange-traded funds (ETF), except that instead of
issuing and redeeming shares as needed, CEFs issue a fixed number of
shares at the IPO.
After that, CEF shares trade
on the open market, just like stocks.
About CEFs
CEFs have an advantage over
ETFs because unlike ETFs, CEFs can use leverage (borrowed funds) to
enhance returns. For instance, they might borrow at 2% to purchase
bonds returning 4%. That’s why closed-end funds often outperform
ETFs focusing on the same market sector.
Here’s one important
difference between CEFs and ETFs that you need to know.
Premiums
vs. Discounts
Unlike conventional mutual
funds and ETFs that trade close the value of their holdings (net
asset value), closed end funds usually trade above (premium) or
below (discount) their net asset values. That’s important because
CEFs trading at discounts typically outperform those trading at
premiums.
In a minute, I’ll describe
three CEFs worth considering, but first a word about this market.
About This Market
As you probably know, with the
exception of the Energy sector, we are currently experiencing a
rough market to say the least. But considering recent news, the
Energy sector could continue strong for some time.
Thus, first two CEFs that I’m
going to describe are Energy sector funds. If you buy them, don’t
consider them long-term holds. Be prepared to sell when the Energy
sector losses steam. However, my third pick, the Highland Income
Fund, is probably less susceptible to market swings.
The fund return data mentioned below is as of
9/7/22.
Energy Sector Funds
BlackRock Energy &
Resources (BGR)
Holds
35 mostly US-based, large-cap energy exploration and production
stocks. Its biggest holdings are Exxon Mobil, Shell, and Chevron.
Based on market prices, the fund returned (share price changes plus
dividends) 40% in 2021 and 25% year-to-date.
BlackRock raised its monthly
payout by 17% in March and then by another 11% in May to $0.049 per
share, which equates to a 5.1% dividend yield. It recently traded at
a 13% discount to its net asset value, a significantly larger
discount than its 9% three-year average.
Pimco Energy & Tactical
Credit Opportunities (NRGX)
Invests
at least 66% of assets in mostly US-based energy-related securities.
Currently, energy pipeline owners comprise 52% of assets and
independent exploration and production companies’ account for 13%.
The fund says its top priority is capital appreciation as opposed to
current income. Based on market prices, the fund returned 69% in
2021 and 21% year-to-date.
Pimco raised its quarterly
distribution by 29% in March to $0.22 per share, which equates to a
5.8% distribution rate. Pimco recently traded at a 15% discount to
its net asset value, about the same as its three-year 14% average.
Real Estate Fund
Highland Income Fund (HFRO)
holds a mix of stocks and debt instruments, mostly real-estate
related. For instance, Real Estate Investment Trusts (REITs),
preferred stocks, mortgage-backed securities, etc. The fund returned
16% in 2021 and 11% year-to-date.
Highland pays a $0.77 per
share monthly distribution which equates to an 8.0% dividend yield.
Highland recently traded at a 25% discount to its net asset value,
somewhat larger than its 22% three-year-average.
As always, historical performance doesn’t predict the
future. Do your own research. The more you know about your funds,
the better your results.
published
9/8/22