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Closed-end funds may help provide exposure to a portfolio of assets at a discount and simultaneously garner attractive yields. Investors can access a diversified portfolio of CEFs through a targeted ETF strategy.
Specifically, the actively managed Saba Closed-End Funds ETF (BATS: CEFS) tries to generate capital appreciation and high income by investing in closed-end funds that trade at a discount to their net asset value while hedging the ETF’s risk to rising interest rates.
“With CEFS, we set out to create an actively managed product through which all investors could access an institutional-quality approach to closed-end fund research and selection,” Leah Jordan, Vice President at Saba Capital, said in a note. “At the same time, we built in hedges to help mitigate the impact of a rising rate environment, which is exactly where we find ourselves now.”
What’s A Closed-End Fund?
Closed-end funds or CEFs are a publicly traded investment company that raised a certain amount of capital once through an initial public offering. The price of the CEF can fluctuate like any other stock listed on an exchange. However, unlike ETFs, a CEF issues a set number of shares, so the CEF can trade at a high premium or discount to its underlying net asset value.
Saba Capital investment process includes proprietary models that dynamically rank closed-end funds across a variety of factors, such as yield, discount to NAV and quality of underlying securities through a combination of fundamental analysis, quantitative analysis and proprietary screens.
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The majority underlying holdings will be comprised of lower-rated securities and unrated securities of equivalent investment quality, which tend to generate the highest yield opportunities.
CEFS shows an annualized distribution yield of 8.37%. The portfolio includes 19 CEF holdings with 73% in fixed-income assets and 27% in equities exposure.
Related: Closed-End Funds vs. ETFs: Why Not Both?
For more information on dividend-paying strategies, visit our dividend ETFs category.