The Easy Way to Invest in Closed-End Funds

The universe of closed-end funds (CEFs) attracts investors because of the high yields many pay. My subscribers know I have serious reservations about investing in CEFs.    

I’ve been known to call the CEF world the “junkyard of Wall Street.”  Closed-end fund sponsors do not redeem shares from investors; rather, once shares are issued, they trade only on stock exchanges. So a CEF fund sponsor with an underperforming fund continues to earn management fees, no matter how poorly the fund performs.

And there are many poorly performing CEFs. I often tell my subscribers that I know there are gold nuggets in the CEF world, but I don’t have time to dig through the 400-plus available CEFs.

Closed-end funds can trade at discounts or premiums to their net asset value (NAV) or book value. The differences from NAV can be extreme. For example, the FS Credit Opportunities Fund (FSCO) has maintained a stable NAV, but over the last eight months, the share price has fallen from near the NAV to a current 29% discount, which stinks if you bought shares last year.

Which brings us to an interesting way to invest in the CEF space. The Amplify CEF High Income ETF (YYY) is a fund of funds. Structured as an ETF— a good thing—YYY holds a select portfolio of CEFs.

YYY holds 60 CEFs, diversified by asset class and CEF issuers. The portfolio CEFs are purchased at discounts to NAV, offering appreciation potential while also earning a high average yield. Here are the fund’s top holdings as of June 30:    

The YYY portfolio holds 50.1% in bond-focused CEFs, 37.14% in stock funds, and 12.76% in hybrid (holding both stocks and bonds) funds.    

YYY has paid a $ 0.12-per-share monthly dividend since August 2021— an almost five-year stretch. The current distribution rate is 12.49%.    

I think YYY would be a better way to invest in CEFs rather than looking for individual funds.