High yields and above-average income are desirable traits, particularly in today’s climate of depressed bond yields, but those favorable characteristics don’t come cheap.
At least, that’s the conventional wisdom. However, some closed-end funds are currently sporting attractive valuations, and that could highlight valuation opportunity with the income-rich Invesco CEF Income Composite ETF (NYSEARCA: PCEF).
Home to 126 closed-end funds, PCEF tracks the S-Network Composite Closed-End Fund Index. Closed-end funds and PCEF could be alluring on the back of fourth-quarter tax-loss selling that some experts believe is keeping a lid on valuations.
“Additionally, CEFs typically provide attractive income to shareholders through monthly distributions, which are paid out of the fund’s NAV,” according to BlackRock research. “These dynamics may create an opportunity for the investor to realize a ‘tax loss’, even in situations where the investor’s total return is positive. This selling results in additional supply and may further reduce a fund’s market price. Selling may be amplified in asset classes that experience elevated levels of volatility in a given year.”
PCEF sports a tantalizing 30-day SEC yield of 6.67% and carries a four-star Morningstar rating — metrics that are sure to grab some investors’ attention. For those that need more convincing, the time could be appropriate for income-hungry investors to examine closed-end funds.
“Based on historical trends, investors that have purchased CEFs in the latter part of the fourth quarter have generally realized the benefits of tax loss selling through the short-term effect of discount narrowing (market price outperforms NAV) most prevalent in the month of January. Notably, on average CEF discounts have narrowed in January in 16 out of the last 20 years,” adds BlackRock.
In other words, PCEF could be subject to its own “January Effect,” potentially helping investors start 2022 on a strong note.
“While most CEF categories had positive returns on the year and have seen discounts reduced, certain sectors and select funds still trade at larger than average discounts, which could present a good long-term entry point,” concludes BlackRock.
Bank loans, municipal bonds, investment-grade debt, and sector equity are among the best-performing closed-end fund segments in 2021. The $944.6 million PCEF provides exposure to some of those groups.
PCEF components invest in taxable investment-grade and high-yield debt. Yields on these holdings are boosted via options writing. In fact, more than 37% of the fund’s holdings are options income closed-end funds, and almost 28% are junk bond funds.
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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.