Closed-end funds are similar to exchange-traded funds, except that instead of issuing and redeeming shares as needed, closed-end funds issue a fixed number of shares at the initial public offering. After that, closed-end funds shares trade on the open market just like stocks.
Closed-end funds have an advantage over exchange-traded funds because unlike exchange-traded funds, closed-end funds 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 exchange-traded funds focusing on the same market sector.
Here’s one important difference between closed-end funds and exchange-traded funds that you need to know.
Unlike conventional mutual funds and exchange-traded funds that trade close the value of their holdings (net asset value), closed-end funds usually trade greater than (premium) or less than (discount) their net asset values. That’s important because closed-end funds trading at discounts typically outperform those trading at premiums.
In a minute, I’ll describe three closed-end funds worth considering, but first a word 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 closed-end funds 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.
• BlackRock Energy & Resources (ticker: BGR): holds 35 mostly U.S.-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 4.9 cents 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.
Highland Income Fund (HFRO) holds a mix of stocks and debt instruments, mostly real-estate related. For instance, real estate investment trusts, preferred stocks, mortgage-backed securities, etc. The fund returned 16% in 2021 and 11% year to date.
Highland pays a 77 cents per share monthly distribution which equates to an 8% 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.
Harry Domash of Aptos publishes the Winning Investing and the Dividend Detective websites. Contact him at www.winninginvesting.com or Santa Cruz Sentinel, 324 Encinal St., Santa Cruz, CA 95060. To see previous Domash columns, visit santacruzsentinel.com/topic/Harry_Domash.