Tap Closed-End Funds for Private Market Access

With advisors and investors scrambling to find higher yields and generate more income outside of the bond universe, closed-end funds (CEFs) are getting more attention.

Though the landscape isn’t as large as the mutual fund and index fund arenas, there are still a dizzying array of options. With the Invesco CEF Income Composite ETF (NYSEARCA: PCEF), investors don’t have to pick individual closed-end funds. PCEF offers market participants more benefits beyond its eye-catching dividend yield of 6.64%.

The CEF structure allows “for greater flexibility in the types of investment strategies that can be used and helps portfolio managers stay invested for the long term without forced selling. Additionally, managing daily investor flows may constrain a portfolio manager and impact a fund’s return in two ways: 1) they may be forced to hold short-term cash investments which may be a drag on returns and 2) they have less flexibility to invest in less liquid securities, including private investments, which may limit potential upside. CEFs are free from the constraints of investor influenced daily liquidity, potentially increasing income and returns,” according to BlackRock research.

The Rise of Private Markets

PCEF, which tracks the S-Network Composite Closed-End Fund Index, clearly offers a compelling yield with some of its income driven by options strategies. Meanwhile, its holdings feature an attractive structure. Yet there’s more to the ETF’s story.

The CEF thesis and that of PCEF is enhanced by the rise of private markets. Private market investing is generating more buzz because of impressive returns and lower correlations relative to traditional assets. However, it’s hard to access for many investors. CEFs can help.

“There’s been a shift of wealth creation toward private markets, however, private investments are typically difficult to access. We believe private equity exposure is important as it gives investors access to the full opportunity set. For example, over the last 20 years, the number of private companies has increased 41% while the number of public companies have decreased by about 36%,” adds BlackRock.

Whereas standard daily liquidity funds feature no private market access and no avenues to avoid forced selling, CEFs do. Conversely, CEFs check those boxes alongside private funds, but private funds usually lack the low fees, low minimum investments (no minimum is required with PCEF), tax simplicity, and liquidity of ETFs.

Not all of PCEF’s components feature private markets access, but as demand for that exposure grows, it’s also possible that the ETF will respond over time.

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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.