VettaFi’s Associate Director of Research, Roxanna Islam, joined the Active Investment Company Alliance’s The NAVigator podcast and host Chuck Jaffe to talk ETFs, and specifically, buying closed-end funds in the ETF wrapper. The ETF wrapper comes with all sorts of built-in advantages for investors and advisors that have been especially relevant in tax season, but thanks to their flexibility, investors may want to consider the merits of closed-end funds ETFs.
Islam, who has prior experience as a closed-end fund (CEF) analyst, explained that advisors are often generalists themselves who may be more familiar with ETFs than with closed-end funds, leading to the latter vehicle seeing smaller AUMs. ETFs, however, may be worth considering for how they can get the advantages of CEFs like closed-end fund distribution rates, out to a wider audience, she noted, with distribution rates available in the market between 7% to 12%.
“There’s obviously nothing wrong with buying the individual closed-end fund but these ETFs provide diversification benefits,” Islam said.
“So they’re not just appropriate for the investors who are uncomfortable with direct investment in closed-end funds like I mentioned earlier,” she added, “but maybe you’re already a closed-end fund investor and you have a handful of favorites, you can supplement your portfolio with an ETF of closed-end funds and get some additional yield and some added diversification.”
Jaffe brought up some concerns investors may have about closed-end funds, with individual closed-end funds already charging a notable fee before adding the fee of an ETF on top of that. Those factors are compounded, too, by significant investor interest in closed-end funds stemming from many closed-end funds offering big distributions at bargain prices sometimes finding that an ETF may not only be buying those bargain CEFs.
Islam underscored that fees are the main concern for many investors and agreed that CEFs can be expensive, but the ETF wrapper itself isn’t the main source of that cost, with the type of ETF particularly relevant and important to consider when looking for those big distributions at bargain costs.
“When you look at some of these passive ETFs of closed-end funds, the management fee for all of these is around 0.5%, so for example, in an ETF like the Invesco CEF Income Composite ETF (PCEF ), which we can go into a little bit later, has a management fee of 0.5%, and then it has the acquired fund fees of 1.49%, and then the total expense ratio is 1.99%,” Islam said. “So really the ETF wrapper itself doesn’t have to add that much to the existing fee.”
In terms of CEF ETF options out there, a suite of ETFs was mentioned during the podcast including PCEF as well as the First Trust Income Opportunities ETF (FCEF ), the Amplify High Income ETF (YYY ), the VanEck CEF Muni Income ETF (XMPT ), and the Saba Closed-End Funds ETF (CEFS ).
Each strategy comes with its own particular flavor, with CEFS for example using short hedges to deal with rising interest rates, Islam said, while PCEF specifically gives a higher weight to CEFs with the biggest discounts. PCEF invests in all kinds of CEFs except municipally-focused CEFs, which is the focus of XMPT, instead, for example.
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