For investors looking for opportunities to generate income, closed-end funds (CEFs) can be an attractive option. Known for their income potential, these investment vehicles are unique for several reasons, including their closed structure and their ability to provide regular distributions.
Like open-ended funds, CEFs include multiple types of offerings to fit almost any portfolio. Below, we dive into the income possibilities associated with CEFs and why you should consider adding them to your portfolio.
The Potential of Higher Regular Income
One of the biggest reasons investors include CEFs in their portfolios is because they offer the potential for higher returns over a longer period of time. This is due largely to their use of leverage—borrowed capital which enables additional investments.
While it’s worth noting that leverage carries a certain amount of risk since it amplifies both positive and negative returns, it also enables funds to invest in securities that may have higher rates of return. As a result, CEFs have the potential to outperform other types of investments over the long term, thereby making them a solid choice for those with longer investment horizons.
The Ability to Provide Regular Distributions
Regular distributions are another benefit of CEFs. These are generally paid out on a monthly or quarterly basis and can provide a consistent income source. This is true for CEFs that invest in asset classes associated with income (such as bonds) as well as other asset classes (such as stocks).
These types of distributions can be especially beneficial for those in or nearing retirement, or individuals looking to expand existing income streams.
Simplified Portfolio Diversification
With market volatility projected to be an ongoing trend in the coming months, a diversified portfolio can be a helpful way to manage risk. While CEFs that use leverage can entail added risk, they can also play an important role in helping to diversify a portfolio.
One of the ways they do this is by facilitating broad market exposure. Although the specific type of exposure varies depending on the fund, it can include exposure to a range of securities within a specific asset class or exposure to multiple asset classes such as municipal bonds and equities.
Another way CEFs can increase exposure is by enabling investments in less liquid assets such as alternatives. As part of a well-balanced portfolio, this exposure can help to lessen the impact of market fluctuations and lead to better performance.
Income investing has confronted several challenges over the past year. With bond yields hitting record lows in recent months, many income-seeking investors have experienced lower rates of return. CEFs can provide an effective alternative. In the fourth quarter of 2020, CEF yields averaged 7.8% based on net asset value (NAV). That trend has continued throughout the first part of 2021.
As the number one closed-end fund provider by AUM, Nuveen has a variety of funds for different investor goals. With more than 120 years of experience, they are also experts in managing assets designed for income.
Balancing short- and long-term investment goals is one of the core challenges of creating a well-rounded portfolio. The right investment mix can help to address this issue. Adding CEFs to your portfolio could balance the performance of other investments and help you meet your income needs.
It is important to consider the objectives, risks, charges and expenses of any fund before investing. Investing in closed-end funds involves risk; principal loss is possible. There is no guarantee a fund’s investment objective will be achieved. Closed-end fund shares may frequently trade at a discount or premium to their net asset value (NAV). Closed-end fund historical distribution sources include net investment income, realized gains, and return of capital. All investments carry a certain degree of risk and there is no assurance that an investment will provide positive performance over any period of time. Leverage increases return volatility and magnifies a fund’s potential return whether that return is positive or negative. There is no guarantee a fund’s leveraging strategy will be successful.
Nuveen Securities, LLC., member FINRA and SIPC.