By Paul Katzeff, Investor’s Business Daily
Looking for income? The yield on 10-year Treasury notes is paltry 1.75%. One-year certificates of deposit pay an anemic 1.11% on average, according to Bankrate.com.
Closed-end funds (CEFs) can be one solution, with yields averaging 6.73%.
Their yields range from 6.32% on average for bond CEFs to 7.22% for the average stock CEF, according to Lipper Inc.
Energy MLP CEFs had 12-month yield as of April 30 averaging 12.97%, the highest of any Lipper category. The lowest average 12-month yield was 1.05% for developed market CEFs.
But CEFs can entail risk. And the ways they work strike many investors as puzzling. So before you pile into one, be sure you understand their pros and cons.
Start by refreshing your memory about what a CEF is — and how it differs from a regular mutual fund, which is an open-end fund. At any given time, a CEF has a fixed number of shares, like a stock or an ETF. Except for the initial public offering, you buy existing shares from other investors, typically through a broker. And the shares trade on an exchange.
With a regular mutual fund shares, you buy from the fund itself. And the number of outstanding shares can fluctuate daily.
Open-end fund share values reflect the cumulative value of underlying stocks, bonds and other assets, divided by the number of outstanding shares.
CEF share values are based on their underlying assets as well as on investor demand, so CEF shares commonly trade at a premium or discount to their NAV. That’s a key trait. It makes them more volatile than open-end fund shares. If a CEF’s discount is temporary, that’s when it is better to buy shares. “BlackRock believes that it may be advantageous to purchase a (CEF) when it is trading at a discount to its NAV, as each dollar invested purchases more than a dollar of net assets,” the giant asset manager said in a promotional report.