Closed-end funds (CEFs) are similar to exchange-traded funds (ETFs), except that instead of issuing and redeeming shares as needed, closed-end funds issue a fixed number of shares at the time of purchase. initial public offering. After that, closed-end fund stocks trade in the open market just like stocks.
Closed-end funds have an advantage over exchange-traded funds because unlike exchange-traded funds, closed-end funds can use leverage (borrowed funds) to improve returns. For example, they could borrow at 2% to buy bonds at 4%. This is why closed-end funds generally outperform exchange-traded funds focused on the same market sector.
Premiums vs discounts
Unlike conventional mutual funds and exchange-traded funds which trade at the close of the value of their holdings (net asset value or net asset value), closed-end funds can trade at more (premium) or less (reduction) of their net asset value. This is an important distinction because my research has found that closed-end funds that trade at a discount typically outperform those that trade at a premium. That said, in some cases it’s worth paying for the performance.
Here are three closed-end funds that have seen total returns of 39% to 60% (price appreciation plus dividends) over the past 12 months.
Convertible bonds: high yields
Bancroft Fund (BCV ticker): A member of the Gabelli family, Bancroft mainly holds convertible bonds and preferred shares issued by companies which can be exchanged for common shares under certain conditions. It seems like a profitable strategy. According to Morningstar, Bancroft has returned (share price appreciation plus dividends) to 50% over the past 12 months and to an average of 26% per year over the past three years. Bancroft currently pays a quarterly dividend of 32 cents per share plus a large variable payment in December. Based on his payments over the past 12 months, this equates to a dividend yield of 9.9%. Bancroft recently traded at a 3% discount to its net asset value (NAV).
Micro caps: Hot category
Royce Micro-Cap Trust (RMT): Holds relatively small stocks (market caps below $ 2 billion), this is where the action takes place these days. The largest holdings include Par Technology (ticker PAR), Mesa Laboratories (MLAB), AutoCanada (AOCIF), nLight (LASR) and Magnite (MGNI). Royce has reported 81% in the past 12 months and an average of 16% per year over the past three years. Pays quarterly dividends of 16 cents per share, which equates to a yield of 5.2%. Royce recently traded at an 11% discount to its net asset value.
Stocks and bonds
Virtus AllianzGI Diversified Income & Convertible (ACV) ‘Holds a mix of equities, lower quality or unrated corporate bonds, some convertible into equity and preferred stock. The biggest holdings of stocks include Alphabet (GOOG), Facebook (FB), Microsoft (MSFT), Amazon (AMZN) and Apple (AAPL). Virtus has reported 63% in the last 12 months and an average of 25% per year for three years. Pays nearly 17 cents per share in monthly dividends (5.8% yield) and recently traded at a 4% discount to its net asset value.
As always, historical performance does not predict the future. Do your own research. The more you know about your funds, the better your results.
Harry Domash of Aptos publishes the Winning Investing and Dividend Detective websites. Contact him at www.winninginvesting.com or Santa Cruz Sentinel, 324 Encinal St., Santa Cruz, CA 95060. To view previous Domash columns, visit santacruzsentinel.com/topic/Harry_Domash.