An alternative investment.
As the bull market rolls along and yields from fixed-income investments disappoint, investors seeking cash flow have few options. Closed-end funds, or CEFs, are similar to mutual funds or exchange-traded funds, and may include various assets such as stocks, bonds or a combination of both. Like mutual funds, CEFs are managed by professionals and frequently offer dividend payments. But the closed-end fund offers a fixed number of shares. The fund raises capital through an initial public offering. After the IPO, the fund is listed on an exchange and trades in the secondary market, similar to a stock. CEFs can sell at a premium or discount to the net asset value of the underlying investments. The best closed-end funds for income offer investing ideas from often-overlooked corners of the market.
Macquarie/First Trust Global Infrastructure/Utilities Dividend & Income Fund (ticker: MFD)
This closed-ended equity mutual fund was created and managed by First Trust Advisors, Macquarie Capital Investment Management and Four Corners Capital Management. The fund invests in dividend-paying stocks from across the globe operating in the infrastructure and utility sectors. The fund measures its performance against the S&P 500 Utilities Index. The majority of the fund's investments span domestically and internationally with global representations in the U.K., Australia, Italy, Canada and Hong Kong. The oil and gas industries represent a quarter of the fund's holdings while the next largest sectors are electric, water and gas utilities. The remaining equities represent transportation, media, telecommunication and energy equipment sectors. The fund's high yield and discount to net-asset value suggest investments in out-of-favor industries. Contrarians might consider this high-yielding fund.
Gabelli Equity Trust (GAB)
Veteran value investor Mario Gabelli is at the helm of Gabelli Funds, which runs this closed-end fund. With decades of bottoms up value investing research, the Gabelli managers invest in undervalued equity across market caps and diverse sectors. The fund includes preferred, convertible and warrant securities, too. The fund may also invest in derivatives including call or put options and nonliquid securities. Recently, Moody's Investors Service assigned an A1 score to the fund's new $100 million Series-K preferred shares, assigning confidence to the fund management. GAB's top holdings include Mastercard (MA), Rollins (ROL), Honeywell International (HON), American Express (AXP), and Ametek (AME). The fund benchmarks its performance against the S&P 500, the Dow Jones Industrial Average and the Nasdaq composite.
Tekla Healthcare Investors (HQH)
HQH is managed by Tekla Capital Management. Daniel Omstead, the firm's president and CEO, has a background in the biotech and pharmaceutical industries. That gives this pick among the best closed-end funds list additional credibility. The health care focused closed-end fund invests in small-cap firms within the health care, biotechnology, medical devices and pharmaceutical industries worldwide. The equities are selected based upon fundamental analysis and market share prospects. The fund benchmarks its performance against the Nasdaq Biotechnology Index, the S&P 500, and the S&P 1500 Health Care Index. The top fund holdings include Gilead Sciences (GILD), Amgen (AMGN), Vertex Pharmaceuticals (VRTX) and Illumina (ILMN).
Saba Closed-End Funds ETF (CEFS)
The Saba Closed-End Funds ETF is an actively managed closed-end, fixed-income ETF that generates income by investing in other closed-end funds trading at a discount to NAV at 8.9%. This means all of the investments within the fund are on sale and selling for less than their actual value. The fund employs the managements' years of trading and hedging experiences along with proprietary algorithms to assess yield, discount and quality of investments, says Leah Jordan, who handles investor relations and marketing at Saba Capital Management. The fund's goal is to outperform index-based closed-end funds through active trading. CEFS uses hedging instruments to offset the impact of interest rates on fixed-income values. The fund includes nearly 30 diversified closed-end funds. CEFS composition includes corporate bonds as well as government and municipal bonds. The bond rankings range from AAA to below B. The more than 2% management fee might deter cost-conscious investors.
Aberdeen Asia-Pacific Income Fund (FAX)
This fixed securities fund has a global bent. Managed by Adam McCabe, head of fixed income, the fund's objective is to provide monthly income by investing in locally researched Asian and Australian debt securities. FAX invests in debt issued by governments, corporations and banks in Asia, Australia and New Zealand. The Asian bond investments hail from China, Hong Kong, India, Indonesia, Japan, Malaysia, Pakistan, the Philippines, Singapore, South Korea, Taiwan, Thailand and Vietnam. This gives U.S. investors an opportunity for higher yields than are typically available in the U.S. The fund managers expect a positive outlook over the medium term for these regions, McCabe says. There's also optimism that a trade truce between the U.S. and China will benefit the Asian markets.
Royce Value Trust (RVT)
A list of best closed-end funds for income would be incomplete without the oldest and largest small-cap closed-end fund managed by portfolio manager Chuck Royce. The fund scours for small-cap companies that look mispriced, under-appreciated, with a discernible margin of safety and trade at a discount. Most of the fund's top five holdings are not household names; FLIR Systems (FLIR), Heico (HEI), MKS Instruments (MKSI), Kirby (KEX), and Quaker Chemical (KWR). At the end of September, the fund had outperformed the benchmark Russell 2000 for the last five years; it also outperformed the index 20 and 25 years ago, too. The low 0.63% expense ratio adds to the allure of this 33-year-old fund.
First Trust Specialty Finance and Financial Opportunities Fund (FGB)
This small-cap value fund targets financial firms including business development companies, real estate investment trusts, mortgage-related companies and other specialty finance firms. Using fundamental analysis, the fund benchmarks its returns against the Wells Fargo Business Development Company Index, the FTSE NAREIT Mortgage REIT Index and the S&P SmallCap 600 Financials Index. The fund's primary goal is income. The 2.3% expense ratio is on the higher end of the closed-end fund spectrum. But the yield might offset the fee. Investors seeking active management for financial firms might consider this targeted closed-end fund.
Take a look at these best paying closed-end funds:
-- Macquarie/First Trust Global Infrastructure/Utilities Dividend & Income Fund (MFD)
-- Gabelli Equity Trust (GAB)
-- Tekla Healthcare Investors (HQH)
-- Saba Closed-End Funds ETF (CEFS)
-- Aberdeen Asia-Pacific Income Fund, Inc. (FAX)
-- Royce Value Trust (RVT)
-- First Trust Specialty Finance and Financial Opportunities Fund (FGB)