Overview
Many of us are familiar with investing in individual dividend growth companies or exchange traded funds. There is another investment type that may be interesting and useful on our dividend investing journey that you may have not considered: Closed End Funds or CEFs.
This article is intended to address what CEFs are, how they work, common terminologies, what to look for and what to avoid, some popular CEFs to begin your research on, and resources to use to research CEFs.
What are CEFs?
Closed End Funds, or CEFs, is a type of investment company. The company issues a fixed number of shares, hence the name Closed-End, and uses the investment dollars to invest in different types of investment objectives, depending on the fund’s charter. These investments can be in stocks, bonds, or other securities and sometimes private companies. CEFs differ from ETFs in that ETFs are open-ended, meaning more shares of the ETF are issued as new investment dollars are added to the fund.
CEFs have been in existence since 1893, many decades before mutual funds were established and nearly a century before ETFs were mainstream.
How do CEFs work?
CEFs are traded on the exchanges just like stocks and ETFs. Since the CEF has a fixed number of shares, the investment management company cannot accept new money after the initial set up. Any shares that you buy and sell are traded among investors, not created by the management company like what happens in an ETF. The company will use the funds received from the initial funding to buy investments. CEFs can also borrow money, called leverage, to increase the amount of money available for investment. It is not uncommon to have 25% leverage in a CEF, meaning they are borrowing 25% of the initial asset amount to increase the investments it can make.
CEFs are actively managed and generally have higher expense ratios than ETFs, but also can give access to less liquid investments, like private companies, that an ETF couldn’t invest in. Many CEFs also utilize an options strategy (covered calls and cash secured puts) to enhance the income generated and returns.
One of the major benefits of CEFs is the higher distributions (dividends) that are paid. Many CEFs have 5-12% yields.
Common Terminology
NAV – Net Asset Value – the value of all fund assets minus liabilities divided by the number of shares. This shows the value of the investments in the fund.
Premium / Discount – the amount under (discount) or over (premium) the shares are trading for compared to the underlying asset’s NAV.
Leverage – the use or the amount of additional capital that is raised by a fund through a debt issuance
Expense Ratio – the annual fees and expenses that the management company charges to run the fund. It is expressed as a percentage of assets. Examples include 0.75%, 1.1%, etc.
What to look for and what to avoid
As with any investment, you need to understand what you are investing in. Some criteria to research include:
- Understand the investment objectives – what is the fund trying to accomplish? Total return, current income, etc.
- The portfolio – what is the fund investing in?
- Distribution safety – is the payout too high, have the distribution been cut before?
- Total performance results – if the payout is high but the fund loses value, it is not a good long term investment
- Premium / Discount – based on market conditions the fund can trade for more or less than the NAV of the underlying investments are worth. Generally speaking, buying a fund at a Discount means you are getting a better value.
- Expenses – many CEFs charge 1% or more in annual expenses. These fees come directly out of the annual returns, so make sure you are aware and comfortable with the fees
- Liquidity – are shares of the fund bought and sold regularly. Can you sell if you need to without being required to sell at a deep discount because there are not many buyers.
Popular CEFs
These are not recommendations to buy, but here is a list of some of the most popular and best performing CEFs today.
Top 10 Year Performance – as of 07/09/22, per cefchannel.com
| Rank | Symbol | Fund Name | 10 YR CAGR | Current Yield |
| 1 | STK | Columbia Seligman Premium Tech Growth | 16.16% | 7.03% |
| 2 | BTO | John Hancock Financial Opportunities | 14.79% | 7.10% |
| 3 | BME | Blackrock Health Sciences Trust | 13.75% | 5.84% |
| 4 | USA | Liberty All-Star Equity Fund | 13.60% | 12.18% |
| 5 | ASG | Liberty All-Star Growth Fund | 13.34% | 15.83% |
| 6 | EOS | Eaton Vance Enhanced Equity Income Fund II | 13.28% | 9.55% |
| 7 | CSQ | Calamos Strategic Total Return Fund | 12.86% | 8.78% |
| 8 | EVT | Eaton Vance Tax-Advantaged Dividend Income Fund | 12.64% | 7.83% |
| 9 | UTF | Cohen & Steers Infrastructure Fund | 12.42% | 7.28% |
| 10 | ADX | Adams Diversified Equity Fund | 12.34% | 1.26% |
Personally, I own the following CEFs:
- ASG – Liberty All-Star Growth Fund
- BDJ – Blackrock Enhanced Dividend Equity
- BME – Blackrock Health Sciences Trust
- BMEZ – Blackrock Health Sciences Trust II
- BST – Blackrock Science and Technology Trust
- BSTZ – Blackrock Science and Technology Trust II
- QQQX – Nuveen Nasdaq 100 Dynamic Overwrite Fund
- STK – Columbia Seligman Premium Tech Growth
- UTF – Cohen & Steers Infrastructure Fund
- UTG – Reeves Utility Income Fund
Resources
One of the primary locations to research CEFs is directly on the funds’ website. All CEF administrators have the data regarding their funds on the company website. Other resources include:
www.CEFChannel.com
www.Blackrock.com/us/individual/education/closed-end-funds
Conclusion
Make sure to do your own research and understand the pros and cons as well as the risk and reward of CEF investing. Past performance is no guarantee of future results. All funds listed are not recommendations but for informational purposes only.
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