Here are the best closed-end funds for income.
Closed-end funds have been around for more than a hundred years. Today, they currently offer juicy yields. Shares of CEFs are traded on the open market. Like stocks, CEFs are offered at an initial public offering. They're invested in a portfolio of securities and managed by an investment firm. Unlike typical mutual funds, new money doesn't flow into these funds; the existing shares are bought and sold by investors. CEFs, similar to exchange-traded funds, invest in a variety of securities, such as stocks, bonds and alternative investments. CEFs can also sell at a premium or discount to their net asset value -- meaning you can essentially buy shares on sale. CEFs have a distribution rate, instead of a dividend rate, and this may consist of earnings, capital gains and return of principal. If you're considering a CEF, review its prospectus to understand how the yield is determined. Here are seven of the best closed-end funds for income across a variety of sectors.
The India Fund (IFN)
Investors who are bullish on the future of the Indian economy might consider IFN. The fund seeks long-term capital appreciation by investing in the shares of Indian companies. India has been one of the fastest-growing economies in the world. But like most of the world, India's growth is being hit by the current pandemic. "We intend to add to the fund's positions and seek to take advantage of investment opportunities in what we believe are strong companies whose stock prices have been unduly punished," says James Thom, senior investment director at Aberdeen Standard Investments. The hefty discount to net asset value (NAV) of nearly 14%, as of the end of May, makes this fund a bargain for the long term.
Expense ratio: 1.35%
Voya Emerging Markets High Dividend Equity Fund (IHD)
This fund predominantly owns emerging markets dividend-producing securities. IHD also sells call options to boost income. The underlying value of the call options represent approximately 15% to 50% of the total value of the fund. At present, emerging market stocks are close to fair value, unlike much of the overvalued U.S. equity market, says Steven Jon Kaplan, CEO of True Contrarian Investments. This CEF owns many recognizable names, such as Alibaba Group (BABA), Tencent Holdings (TCEHY), Taiwan Semiconductor Manufacturing (TSM) and Samsung Electronics. The fund is heavily weighted in the financials and information technology sectors with 21% and 20% allocations, respectively.
Expense ratio: 1.39%
Aberdeen Total Dynamic Dividend Fund (AOD)
With yields hard to come by in today's market, AOD fills a niche by seeking companies with high current dividend income and, only secondarily, growth of capital. The equity fund integrates four investment strategies -- growth, value, special dividends and dividend capture rotation -- to maximize income. The investments are culled from world markets to include the strong dividend payers and those with dividend-growth potential. The fund's top holdings include well-known names such as Apple (AAPL), Microsoft (MSFT), Williams Companies (WMB), Intel (INTC) and Barrick Gold (GOLD). According to Morningstar, AOD is characterized as a large-cap and value-leaning fund. To increase income, the fund may also engage in short selling. Those seeking an actively managed dividend fund might consider this "on sale" investment, selling at a 13.49% discount to NAV as of the end of May.
Expense ratio: 1.18%
BlackRock Taxable Municipal Bond Trust (BBN)
This is another CEF that seeks high current income first and capital appreciation second. The fund invests at least 80% of its assets in taxable municipal bonds, including Build America Bonds. "BABs were issued in the aftermath of the Great Recession to help local governments with funding infrastructure projects," says Stoyan Panayotov, CEO of Babylon Wealth Management. "The interest on these bonds is subsidized by the federal government, which makes them a lot safer than a typical municipal bond." The fund can also invest up to 20% in other taxable municipal bonds like U.S. Treasurys and bonds issued by private universities and hospitals. BBN has been an outstanding performer in the last decade due to its attractive yield and low correlation with other asset classes, Panayotov says.
Expense ratio: 0.88%
Hercules Capital (HTGC)
Not technically a fund, Hercules Capital is a specialty business development company. Hercules provides funding -- typically in the form of debt -- to high-growth venture capital-backed companies in various industries. The firm has originated more than $10.2 billion in total debt commitments. Since inception, Hercules has funded scores of firms, including Fuze, Gazelle, Facebook (FB), Everyday Health and DocuSign (DOCU). With a market cap of $1.25 billion, Hercules is the largest venture-focused BDC, with total investments of $2.47 billion. "The company is also one of the few internally managed BDCs, meaning it does not charge management fees from shareholders and is not incentivized to grow assets," says Scott Bluestein, CEO at Hercules Capital.
PIMCO High Income Fund (PHK)
Another candidate for the list of best funds for income is this fixed income fund, which uses a dynamic asset-allocation strategy to choose fixed income securities from various sectors. High current income is PHK's focus, with capital appreciation as a secondary objective. The fund is permitted to invest in securities below investment-grade, or junk bonds. Additionally, the fund can tap into the global fixed income markets with up to 25% of total assets. PHK is diversified across industries including aerospace, financials, real estate investment trusts focused on military housing and more. Yield-seeking investors willing to tolerate a degree of portfolio volatility might consider this fund from the well-regarded PIMCO family.
Expense ratio: 0.91% (excluding interest expense)
BlackRock Core Bond Trust (BHK)
Conservative investors will appreciate this CEF populated with U.S. Treasurys, investment-grade corporate debt and a smattering of high-yield and foreign bonds. At least 75% of the portfolio is invested in investment-grade bonds. BHK's bonds read like a list of stable concerns. It includes the Federal National Mortgage Association, Verizon Communications (VZ), Bank of America (BAC) and JPMorgan Chase (JPM). "BHK has been a solid performer over the years, and its future performance should benefit from the existing Federal Reserve facilities, which are buying investment-grade U.S. corporate bonds," Panayotov says. Investors seeking a solution to the low interest rate environment might take a look at BHK. The only concern is the fund's fees.
Expense ratio: 1.42% (excluding interest expense)
Top-producing closed-end funds for investors:
-- The India Fund (IFN)
-- Voya Emerging Markets High Dividend Equity Fund (IHD)
-- Aberdeen Total Dynamic Dividend Fund (AOD)
-- BlackRock Taxable Municipal Bond Trust (BBN)
-- Hercules Capital (HTGC)
-- PIMCO High Income Fund (PHK)
-- BlackRock Core Bond Trust (BHK)
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