Closed-end funds (CEFs) don’t get a whole lot of love in the ETF world.
CEFs are portfolios of securities that pay out dividends and capital gains distributions, but, unlike ETFs, they can’t create or redeem shares on a daily basis. Instead, CEFs come to market with a fixed number of shares. They trade intraday, which means CEFs often trade at premiums or discounts to their net asset value.
Some say part of ETF investors’ lack of interest in CEFs is due to an education gap on what closed-end funds offer. A lot of CEFs today came to market in the 1980s, and new issuance is rare. A lot of investors don’t know how they work, or even why they should care.
The other part of the issue is the ETF wrapper itself—the advent of the easy-to-trade ETF structure cast a long shadow on CEFs.
But some ETF issuers are looking to change that conversation. By highlighting the appeal of CEFs—namely, they’re attractive income producers, and, often, good value plays—they are bringing to market ETFs that invest in CEFs, combining the popular ETF structure with the traits unique to the CEF wrapper.
Leah Jordan, vice president of Investor Relations at Saba Capital Management, chatted with us about this underfollowed space, offering the following tidbits:
(Saba is behind the Saba Closed-End Funds ETF (CEFS), launched in 2017. The fund has $26 million in assets under management and has an expense ratio of 2.6%.)
|Ticker||CEF ETFs||AUM ($M)||Exp Ratio|
|PCEF||Invesco CEF Income Composite ETF||726||2.07%|
|CVY||Invesco Zacks Multi-Asset Income ETF||281||0.88%|
|CEFL||ETRACS Monthly Pay 2xLeveraged Closed-End Fund ETN||252||0.90%|
|YYY||YieldShares High Income ETF||199||2.02%|
|XMPT||VanEck Vectors CEF Municipal Income ETF||117||1.56%|
|FCEF||First Trust CEF Income Opportunity ETF||45||2.78%|
|CEFS||Saba Closed-End Funds ETF||26||2.62%|
|MCEF||First Trust Municipal CEF Income Opportunity ETF||13||2.11%|
|GCE||Claymore CEF Index-Linked GS Connect ETN||7||0.95%|
- People often say CEFs are different, esoteric, niche products.
However, that’s not true. In reality, CEFs are hardly niche. Today roughly one in five tickers on the New York Stock Exchange are closed-end funds. They command almost $250 billion in market value. And they can invest in just about anything.
“We like to call ourselves here at Saba the jumbo shrimp—the biggest players in a small pond,” Jordan said.
- ETFs as a wrapper have displaced demand for CEFs.
This is partially true, according to Jordan. Issuance and demand have dropped because of the dawn of ETFs, which offered a low-cost way for investors to “get in and out.”
ETFs and CEFs are pretty similar except for the creation/redemption mechanism. ETFs can create and redeem at any point, whereas CEFs have a fixed number of shares at launch.
- CEFs are a value play, thanks in part to ETFs.
Sometimes, yes. Currently, absolutely. Because CEFs have a fixed number of shares, demand to buy or to sell can cause the fund to deviate from its net asset value. Right now, a lot of CEFs are trading at 10-15% discounts, offering investors access to stocks and bonds at a fraction of their price, according to Jordan. This level of a discount isn’t “normal,” but it can happen.
“Historically, these are products that have oscillated between a premium and a discount, and most of them were at their deepest discounts in '08. But in 2013, the taper tantrum brought the entire fixed-income CEF universe to a discount and they just never bounced back,” Jordan said. “What's unique about this point is that there aren't a lot of things at a discount right now; valuations are very high.”
That makes the opportunity in CEFs compelling, she says. And yet demand is sluggish. One of the reasons CEFs are struggling to go back to a premium is because of ETFs themselves. As a wrapper, investors can simply get similar exposure in an easy-to-trade ETF instead.