With just one month left in 2022, now is an opportune time for investors to do some bargain hunting and tax-loss harvesting with beaten-down assets. When it comes to income-generating asset classes, closed-end funds are among the viable options for year-end considerations. For investors who don’t want to pick among the hundreds of closed-end funds on the market today, the Invesco CEF Income Composite ETF (NYSEARCA: PCEF) could be worth considering.
The exchange traded fund, which tracks the S-Network Composite Closed-End Fund Index, holds 118 closed-end funds, ensuring an admirable level of diversification. Closed-end funds, broadly speaking, are high-yielding assets. As such, it’s not surprising that the group has been plagued by rising interest rates in 2022. However, the silver lining is that valuations in the group are unusually compelling.
“CEFs may allow investors to maintain market exposure and receive monthly distributions, while buying assets at discounted prices. The market sell-off we’ve experienced in 2022 has driven CEF valuations to potentially attractive levels in certain parts of the market, which may provide a timely entry point for long-term investors,” according to BlackRock research.
There’s no denying PCEF’s income proposition is attractive. The $698.1 million ETF, which turns 13 years old next February, sports a 30-day SEC yield of 8.87%. Yields move inversely to prices, indicating that PCEF’s big yield is a sign of weak investor sentiment toward closed-end funds this year.
“CEFs began the year at a median discount of -2%, and 35% of all CEFs were trading at premiums,” added BlackRock. “Fast forward to November and discounts have widened by 8%, bringing the current median CEF discount to -10%, while the number of CEFs trading at a premium has been cut in half.”
That weak sentiment could be one indication of value abounding with the various closed-end funds held by PCEF. Another point underscoring that value proposition is that with the calendar pointing to year-end, some frustrated investors may opt to depart closed-end funds in favor of other assets, potentially creating more value in this high-income segment. That scenario could prove to be a positive down the road for PCEF investors.
“Historically, this dynamic has proved to be an attractive entry point for long-term investors. Looking back over the last 25 years, CEF market price returns have outpaced NAV returns by 7%, on average, in the year following a negative calendar year return. This is due to discount narrowing as certain sectors come back into favor. We believe that the sell-off in 2022 may have presented attractive income and capital appreciation potential in select sectors and funds that trade at large discounts,” concluded BlackRock.
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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.