If someone offered to sell you a dollar for 90 cents … well, you'd probably think it was too good to be true. Yet these are exactly the kinds of opportunities that arise in the market's best closed-end funds (CEFs).
CEFs are a type of investment fund, and in fact, they are older than mutual funds. The very first closed-end fund was launched in 1893 – more than 30 years before the first traditional mutual funds (like those you might find in your 401(k) plan) were created.
As with their mutual fund cousins, CEFs are pooled investment vehicles that hold portfolios of stocks, bonds or other assets. But that's where the similarities stop.
Mutual funds are open-ended. When you want to invest, you or your broker sends cash to the fund, and the manager takes that fresh cash and uses it to buy assets. When you want to sell, the manager will sell a small amount of assets to cash you out. Money is always coming and going, and there's no hypothetical limit to the amount of new money a popular fund can take in and invest.
Closed-end funds are different. CEFs have initial public offerings (IPOs) like stocks, and there is a fixed number of shares that then trade on the stock market. If you want to buy shares, you buy them the same way you'd buy a stock.
And here's where the fun starts. CEF prices are set by the market the same way a share of Apple (AAPL) or Amazon.com (AMZN) would be, but that price can vary wildly from the value of the assets the fund holds. It's not uncommon to see CEFs trading at a premium to the value of the assets they own. But just as you'd never pay $1.10 for a dollar, you're generally better off avoiding CEFs trading a premium.
Discounts, however, are another story. Closed-end funds often sell at massive discounts to net asset value (NAV). In these cases, they're effectively worth more dead than alive!
Another nice aspect of CEFs is that, unlike mutual funds, they can use debt leverage to juice their returns. That same leverage also allows closed-end funds to sport some of the highest yields you're likely to find.
Today, we're going to take a look at the 10 best CEFs for 2022. Each of these funds trades at a reasonable discount to NAV and offers a yield that's at least competitive, if not downright extravagant.
Data is as of Jan. 11. Distribution rate is an annualized reflection of the most recent payout and is a standard measure for CEFs. Distributions can be a combination of dividends, interest income, realized capital gains and return of capital.
Invesco Senior Income Trust
- Market value: $674.9 million
- Distribution rate: 7.1%
- Discount to net asset value (NAV): -5.0%
- Expenses: 1.65%*
We know that the Federal Reserve plans to raise interest rates sooner rather than later. Fed Chairman Jerome Powell has been very clear in recent comments, as have many of his colleagues.
As a general rule, rising interest rates are bad news for bonds, as rising yields mean falling prices. But one way to get in front of that trend and actually profit from it is to buy floating-rate instruments, such as senior loans.
Senior loans are exactly what they sound like. They are bank loans made to companies that the banks then package and sell to investors. The loans are senior, meaning they're first in line to get paid in the event of bankruptcy. They're also generally secured with collateral, making them pretty darn safe.
One way to get access to this asset class is via the Invesco Senior Income Trust (VVR). VVR invests in a portfolio of floating-rate senior bank loans. This means that the interest payments received rise as market interest rates rise.
Closed-end funds are able to take out debt to invest even more money into their selections, which can certainly lead to more volatility – but also bigger distribution rates and returns. And VVR juices its returns by leveraging its portfolio by about 25%.
At current prices, Invesco Senior Income Trust trades at a discount to NAV of about 5%; that's actually a little expensive compared to its five-year historic average discount of about 10%, but it's still a decent bargain on its underlying holdings. It also yields a wild 7.1% in dividends, which happen to be paid monthly.
If you're looking for one of the best CEFs and a solid income payer at a good price, VVR fits the bill.
* Includes a 1.02% in baseline expenses and 0.63% in interest expenses.
Nuveen Credit Strategies Income Fund
- Market value: $886.9 million
- Distribution rate: 7.1%
- Discount to NAV: -5.2%
- Expenses: 2.22%*
Along the same lines, consider the shares of the Nuveen Credit Strategies Income Fund (JQC) when looking for the best CEFs of 2022. JQC also invests in floating-rate loans, though the fund is willing to take a little more risk by gaining exposure to both senior-secured and second-lien loans.
Senior-secured loans are the first in line to get paid, and they're backed by collateral. So, something has to go very wrong here for the bank to lose money.
Second-lien loans are a different story. The owner of a second lien generally gets whatever is left over after the senior creditors have been paid, so there is obviously a little more risk here. The risk is further elevated by hefty leverage of 37% currently.
But with that additional risk also comes the potential for higher return. And it also helps to explain why this CEF is able to pay its investors a fatter distribution rate of 7%.
Nuveen Credit Strategies Income Fund trades at a 5% discount to NAV. That's not exceptionally high, but it definitely beats paying full price!
This is not a position that is likely to make you wealthy overnight, but JQC pays a very competitive yield and should benefit handsomely from rising interest rates.
* Includes a 1.27% in management fees, 0.15% in other expenses and 0.80% in interest expenses.
Ecofin Sustainable and Social Impact Fund
- Market value: $204.8 million
- Distribution rate: 5.9%
- Discount to NAV: -12.2%
- Expenses: 2.33%*
The discount to NAV is one of the most appealing aspects of closed-end funds. Who wouldn't want to buy the whole for less than the sum of the parts?
The problem, of course, is that cheap CEFs can stay cheap forever in the absence of a catalyst to close the discount to NAV. And herein lies the appeal of term funds.
Term funds are CEFs with a shelf life. They are designed to liquidate at NAV at a specific date in the future. So, if you buy one at a discount and hold until liquidation, you should benefit handsomely as that discount narrows.
As a case in point, consider the Ecofin Sustainable and Social Impact Fund (TEAF), which invests primarily in an eclectic mixture of traditional and alternative energy across both the public and private sectors.
TEAF's quirkiness has contributed to it perpetually trading at a deep discount to NAV. Today, the discount is over 12% and it recently exceeded 20%.
But here's the fun part – and what makes TEAF one of the best CEFs to own: The fund is designed to liquidate in 2031. So, anyone buying today can enjoy the 6% dividend for the next nine years while waiting for the discount to close. Not too shabby!
* Includes 1.44% in management fees, 0.66% in other expenses and 0.23% in interest expenses.
ClearBridge MLP and Midstream Fund
- Market value: $415.5 million
- Distribution rate: 6.4%
- Discount to NAV: -16.8%
- Expenses: 3.57%
Speaking of energy, some of the best bargains in the CEF space are in energy-focused funds. And, as an example, look no further than the ClearBridge MLP and Midstream Fund (CEM).
The Clearbridge fund invests in a portfolio of midstream oil and gas pipeline stocks. That's been a rough business to be in over the past several years.
Pipeline companies really got themselves into a mess in the mid-2010s by taking on too much debt and expanding too quickly. Investors got burned when the sector was forced to deleverage following the energy glut that slammed the industry in 2015 and 2016.
Investors fled the sector during the rout and have yet to return, which has helped to keep prices low. That's fantastic news for anyone looking to buy today.
And here's the best part of all: CEM trades at a nearly 17% discount to NAV. That means we're getting a massive discount on an already cheap sector.
ClearBridge MLP and Midstream, which uses moderate leverage of about 17%, can be a volatile fund. It comes with the turf. But you also get the opportunity to enjoy a 6.4% distribution rate while you wait for the fund's discount to NAV to shrink to something a little closer to normal. That's not a bad gig.
ClearBridge Energy Midstream Opportunity Fund
- Market value: $325.4 million
- Distribution rate: 6.0%
- Discount to NAV: -20.3%
- Expenses: 6.4%*
If you liked CEM, you'll probably love its sister fund: The ClearBridge Energy Midstream Opportunity Fund (EMO). Like CEM, EMO invests primarily in a portfolio of oil and gas pipeline stocks.
Most pipeline stocks are organized as master limited partnerships (MLPs). These can be something of a chore to own in that they tend to make your tax returns more complicated. Rather than simply show up on your normal broker 1099-B or 1099-Div, MLPs come with complicated K1 tax statements.
And adding insult to injury, you generally shouldn't hold them in IRA accounts due to the fact that they generate unrelated business taxable income.
Well, as a closed-end fund, ClearBridge Energy Midstream Opportunity doesn't have these issues. EMO allows you to get access to some of the biggest and best names in the MLP space without all the irritating tax complications. Two of its biggest holdings are blue-chip pipeline firms Enterprise Products Partners LP (EPD) and MLPX LP (MPLX).
Another reason EMO is on this list of best CEFs: At current prices, it trades at a gargantuan 20% discount to NAV, which is actually a steeper discount than its historical five-year average of about 13%. It also yields a healthy 6.0%.
* Includes 1.50% in management fees, 2.49% in other expenses and 2.43% in interest expenses.
Nuveen Real Estate Income Fund
- Market value: $361.2 million
- Distribution rate: 6.1%
- Discount to NAV: -2.6%
- Expenses: 1.79%*
This is a tricky time to be looking for income. Inflation has been trending higher – and inflation is death to traditional fixed income investments like bonds.
However, some income assets have built-in inflation protection, and perhaps none more than real estate. Land and building prices tend to at least keep pace with inflation over time, and commercial rental contracts will generally have rent escalators that will rise.
Publicly traded real estate investment trusts (REITs) are a fine way to get exposure to real estate. But why pay retail for them if you don't have to?
The Nuveen Real Estate Income Fund (JRS) is a CEF that invests in REITs. It owns essentially the same collection of REITs you'd expect to find in any mutual fund or exchange-traded fund (ETF), such as logistics REIT Prologis (PLD), self-storage operator Public Storage (PSTG) or data center real estate stock Digital Realty Trust (DLR), but it has the added benefit of owning them at a discount.
At current prices, JRS trades at a 2.6% discount to NAV, which is actually slimmer than its five-year historical average discount of 7%. But it nonetheless offers a healthy yield just above 6%.
The Fed might be successful in bringing inflation to heel. Or we might see several more quarters of high inflation. Only time will tell. But either way, it makes sense to own a little real estate, and JRS is a smart way to do so.
* Includes 1.19% in management fees, 0.11% in other expenses and 0.48% in interest expenses.
First Trust Dynamic Europe Equity Income Fund
- Market value: $233.3 million
- Distribution rate: 5.3%
- Discount to NAV: -12.9%
- Expenses: 2.15%*
Ever since 2008, the U.S. has really led the global bull market. And this might seem normal given that most of the world's largest and most innovative companies reside in the good, ol' U.S. of A.
But it wasn't always like that. Following the tech bust of 2000-2002, European stocks performed exceptionally well as investors fled the growth-centric U.S. market and rotated into the more value-centric European markets.
Could we be on the cusp of another such rotation?
Maybe. Time will tell. But if you want to test the theory, the shares of the First Trust Dynamic Europe Equity Income Fund (FDEU) are a fine way to do so. FDEU owns a diversified portfolio of European blue chips and counts Nestle (NSRGY), Royal Dutch Shell (RDS/A) and Novartis (NVS) among its largest holdings.
At current prices, First Trust Dynamic Europe Equity Income trades at a wide 13% discount to NAV that's better than its 9% historical average, and it yields 5.3% in dividends. That's a high yield for a blue-chip stock fund.
* Includes 1.45% in management fees, 0.26% in other expenses and 0.43% in interest expenses.
Gabelli Dividend & Income Trust
- Market value: $2.4 billion
- Distribution rate: 5.1%
- Discount to NAV: -9.2%
- Expenses: 1.30%*
When looking for one of the best CEFs that's a little closer to home, try the shares of the Gabelli Dividend & Income Trust (GDV).
Managed by legendary fund manager Mario Gabelli and his team since 2003, GDV's investment objective is to provide a high total return with an emphasis on dividends and income. Today, approximately 80% of its portfolio is invested in U.S. securities, with most of the rest in European and Japanese shares.
While you might expect an income fund like this to be loaded up with utilities or other slow-growing high-yielders, that's not the case. GDV counts Alphabet (GOOGL) and PayPal (PYPL) among its top 10 holdings, neither of which pays a dividend at all. It also includes lower yielding growth stocks like Microsoft (MSFT) and Mastercard (MA).
So, while the fund's emphasis is income, there's also a very significant growth component. And that seems to have worked well for GDV, which has an annualized three-year return of 21.2%
At current prices, GDV trades at a deep 9.2% discount to NAV and yields a little more than 5%. If you're looking for a combination of growth and income, the Gabelli fund is a solid option.
* Includes 1.00% in management fees and 0.30% in other expenses.
MFS Municipal Income Trust
- Market value: $284.2 million
- Distribution rate: 4.7%
- Discount to NAV: -6.4%
- Expenses: 1.45%*
Municipal bonds are a popular asset class among America's wealthy and high-income earners. The interest from bonds issued by state or local governments is generally tax-free at the federal level. If you're in the 37% tax bracket, for example, a 2% tax-free yield is the equivalent of 3.2% taxable yield.
For those in a high tax bracket, that's a game changer.
If you like muni bonds, you should love muni-bond CEFs. Muni CEFs put together portfolios of tax-free state and local bonds and add a little leverage to juice that tax-free yield even higher.
And MFS Municipal Income Trust (MFM) is one of the best CEFs for municipal bond investors to consider.
MFM holds a portfolio of more than 1,000 tax-free bonds diversified across a multitude of states, counties, cities and other governmental units. Credit quality is strong for this fund, too, with roughly 84% of the bonds rated BBB or higher. The CEF also utilizes high leverage of about 27%.
At current prices, the fund trades at a 6.4% discount to NAV, which is around its historical average, and yields a competitive 4.7%. If you're in the 37% tax bracket, that 4.7% tax-free yield is the equivalent of a 7.5% taxable yield.
* Includes 0.89% in management fees, 0.13% in other expenses and 0.44% in interest expenses.
BlackRock Municipal 2030 Target Term Trust
- Market value: $1.8 billion
- Distribution rate: 3.2%
- Discount to NAV: -3.6%
- Expenses: 1.01%*
Muni-bond CEFs have the same problem that many equity CEFs have. They perpetually trade at deep discounts to NAV, and nothing seems to shake them out of that rut.
We previously covered the Ecofin Sustainable and Social Impact Fund, which has a liquidation date in 2031. Let's cap this off this list of the best CEFs with another solid term fund: The BlackRock Municipal 2030 Target Term Trust (BTT).
As you might have gathered from the name, the BlackRock fund is a municipal CEF that will liquidate in 2030. The fund trades at a 3.6% discount to NAV. So, apart from any gains due to the underlying bonds rising in value and from the tax-free dividend, we should enjoy a nice kicker as the fund's share price approaches NAV at liquidation.
The CEF is also structured so that the underlying bonds it owns should be approaching maturity by 2030, further reducing the risk of price declines due to rising yields.
Investors should note, however, that the fund is powered by a high 35% in leverage, so this won't be as smooth a ride as holding an indexed muni-bond ETF.
At current prices, BTT sports a yield of 3.2%. If you're in the 37% tax bracket, that translates to a tax-equivalent yield of 5.1%.
You're not going to get wealthy on that, of course. But BTT is a good place to park cash for the next several years to get a competitive, tax-free yield.
* Includes 0.56% in management fees, 0.12% in other expenses and 0.33% in interest expenses.
