Closed-End ETF Makes Life Easier on Income Investors

Closed-end funds represent an interesting asset class for income-hungry investors. However, with thousands of these funds on the market today, selecting the right one is nearly as dizzying for ordinary investors as is stock picking.

Fortunately, some exchange traded funds ease that burden. The Saba Closed-End Funds ETF (CEFS) is part of that group. CEFS, which turned six years old in March, sports a jaw-dropping 30-day SEC yield of 10.84%. That’s sure to be of interest to many investors, but there’s more to the CEFS story.

Importantly, closed-end funds represent one of the four asset classes New York-based Saba Capital focuses on. The others are a credit relative value strategy, tail hedge and special purpose acquisition companies (SPACs).

Additionally, CEFS is actively managed. That’s an important trait in a category with plenty of passively managed competitors. Active management is pertinent and a potential value-add in the closed-end fund space because closed-end funds are comprised of bonds. This means avoidance of credit risk is essential. Likewise, closed-end funds rely on options strategies to increase income, further confirming the utility of active management.

More CEFS Benefits

Another perk of CEFS being actively managed is that the management style could position the fund to capitalize on closed-end funds frequently trading at discounts to net asset values (NAVs).

CEFS is “a fund-of-funds that searches for the best opportunities within the CEF space that offer attractive yields, trade at a discount to net asset value and offers an interest rate hedge. It’s an all-in-one solution that provides diversification and takes the guesswork out of trying to add individual high yield names to your portfolio,” wrote Michael Gayed in the latest edition of the Lead-Lag Report.

Gayed highlighted some of the other potential benefits tied to CEFS. These include active management positioning the fund to weather rising interest rates.

“CEFS is an actively managed ETF that seeks to generate high income by investing in closed-end funds trading at a discount to net asset value, and hedging the portfolio’s exposure to rising interest rates. The investment process includes proprietary screens that dynamically rank closed-end funds across a variety of factors including yield, discount to NAV and quality of underlying securities,” according to Gayed.

CEFS currently holds more than 60 closed-end funds, but the ETF is top-heavy. Just two funds combine for over 32% of its weight. However, CEFS has a solid track record. It’s appealing in terms of diversification as it’s less fixed income-heavy than competing ETFs.

“Over the course of the fund’s 6-year history, that strategy has paid off. It’s earned a 4-star rating from Morningstar and has outperformed its Morningstar in three of the past four years as well as year-to-date 2023,” concluded Gayed.

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.