Earning INCOME with Closed-End Funds

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In this video I'll discuss the basics of Closed-End Funds, or CEFs, and the pros and cons of investing in them.

Video on fundamentals of mutual funds:
   • ESSENTIALS of Mutual Fund Investing  564x

Video on fundamentals of ETFs:
   • ETFs Explained  

To understand what Closed-End Funds, or CEFs are, you can start with regular Mutual Funds or Exchange Traded Funds. Both are nothing more than a pool of investor money that is either managed or unmanaged, but in both cases is used to invest in equities, debt, or whatever it may be for that particular fund or ETF. Closed-End Funds start out as a fundamentally similar idea. They collect money from investors, and then away they go, investing in whatever their strategy dictates. However, how CEFs are structured, and how they operate sets them apart from mutual funds and ETFs, and these differences are fairly significant.

To understand the main difference, you have to take a closer look at the first two words in the CEF name: Closed-End. That means that once the fund raises money, typically with an initial public offering, it then gets closed to new influx of cash. Thus, once the CEF receives its funds, and buys all the securities that its management decides on, no more money comes in or out, and the number of outstanding shares generally stays the same. The fund then works with its holdings to generate income in a number of different ways, while often using leveraging to boost gains.

There are two distinct advantages that a CEF holds over traditional mutual funds or ETFs. The first advantage is more efficient portfolio management. Because the fund is closed, the management team doesn’t have to worry about assets flowing in or out of the fund, and can work with a stable pool of capital. They can then focus on long-term strategy, use leveraging, or go after specialized investments, and are never forced to sell securities in a declining market to meet redemptions.

The second, and very significant, advantage has to do with you, the investor, being able to purchase shares of many CEFs at a discount. Unlike regular mutual funds or ETFs, whose share value is linked directly to their holdings, which is known as Net Asset Value, or the NAV, closed-end fund shares can fluctuate in value like a stock, and often trade below their NAV, or another words below the aggregate value of their holdings. Thus, an investor who does careful research can pick up CEF shares at a discount of 5, 10, or even 20%.

So, what do Closed-End Funds invest in? Well, there are four main categories, or types, of recognized CEFs with numerous investing options within each type.
1. Tax-free income.
2. Taxable income.
3. U.S. equities.
4. Non-U.S. funds

The goal of nearly all CEFs is income, and most of these funds pay out generous dividends on a monthly, or sometimes quarterly basis, and these can range from 7% all the way up to 11% or 12%. These payouts come from interest and dividends earned inside the fund, realized capital gains, and sometimes return of capital, which is the least desirable source.

Because CEFs are only available on the secondary market, you need to buy their shares through a broker. When researching CEFs look for a significant discount below the NAV, distributions funded by income, leveraging at 35% or less, and management fees in the 1% range. An excellent site that I use for my research is CEFConnect.com

DISCLAIMER
This video was created for informational and educational purposes only, and should not be construed as a source of specific investing, financial, accounting, or legal advice. This video should never be used as the sole source of information, without consulting with a financial or legal professional to determine what may be best for your individual needs. The creator of this video, Elliot J. Gindis, does not make any guarantee or other promise as to any results that may be obtained from using the information in the video. To the maximum extent permitted by law, the creator of this video disclaims any and all liability in the event that any information, commentary, analysis, opinions, advice, and/or recommendations contained in this video prove to be inaccurate, incomplete, or unreliable, or result in any financial or other losses.

#investing #funds