VIDEO: ETF of the Week: PCEF

Chuck Jaffe: One fund, on point for today, and the expert to talk about it. This is the ETF of the Week.

Todd Rosenbluth, head of research at VettaFi, [was] at Exchange, the firm’s premiere event for financial advisors, which [was] being held [last] week in Las Vegas. He’ll be back [this] week with another ETF for you to consider. But at VettaFi, they’ve got a deep bench, and Roxanna Islam, the firm’s head of sector and industry research, recently appeared on my show Money Life in a segment we call The Navigator.

That segment is all about investing in closed-end funds, and Roxanna zeroed in on one particular fund, PCEF, the Invesco Closed-End Fund Income Composite. Todd said there’s no one better to discuss it than Roxanna, and it’s a perfect pick to be this week’s ETF of the Week. Enjoy!

Roxanna Islam is here, and we’re talking about the S&P 500 of closed-end funds. This is The Navigator. Welcome to The Navigator, where we talk about all-weather active investing and plotting a course to financial success with the help of closed-end funds. The navigator is brought to you by the Active Investment Company Alliance, a unique industry organization representing the full spectrum of the closed-end fund business, from investors and users to fund sponsors and creators.

If you’re looking for excellence beyond indexing, The Navigator will point you in the right direction. And today, we’re headed in a very specific direction, looking at an ETF that is focused on the closed-end fund space. We’re doing it with Roxanna Islam, the head of sector and industry research at VettaFi. And while we’ll be focusing on one fund, you can dig into the firm’s research on all of the ETFs you’re interested in by going to VettaFi.com.

And if you want to learn more about closed-end funds, interval funds, and business development companies generally, visit aicalliance.org. That’s the website for the Active Investment Company Alliance. Roxana Islam, it’s great to have you back on The Navigator.

Roxanna Islam: It’s great to be back. Chuck.

Chuck Jaffe: Today we’re discussing the PCEF, that’s the Invesco Closed-End Fund Income Composite ETF, which recently celebrated its 15th anniversary, and which you have described as a bellwether for the closed-end fund space, sort of the S&P 500 and the closed-end fund world.

Let’s start with why it’s such a good example of why ETFs work well in a niche investment area, like closed-end funds.

Roxanna Islam: I think this is an excellent example. It recently had its 15-year anniversary a couple of weeks ago in February, which I think is pretty impressive. Lately, we’ve been seeing all sorts of these niche ETFs pop up and then liquidate a couple of years later. And I think it’s particularly relevant now, because we are seeing issuers packaging all sorts of investments into ETFs lately.

Recently, there was a private credit ETF that popped up and made a lot of news. And people wonder, will it work? Because you can put these things into an ETF wrapper, but will investors actually want it? And I think PCEF is an example of this working. Because, [there are closed-end funds packaged] into this ETF wrapper.

It’s a niche category. It does have some higher fund-of-fund fees, yet it still has a decent following. And it has around $800 million in assets.

Chuck Jaffe: It is the granddaddy of them all in the closed-end fund space for ETFs. But there are other entries out there. So what’s new with ETFs looking at the closed-end fund world?

Roxanna Islam: I think what’s really interesting about this is — you sort of touched on it earlier. I mentioned it’s sort of the S&P 500 of closed-end funds. And I say that in a tongue-in-cheek way, but it really represents what’s going on in the industry. It’s the only one that takes a broad view of the taxable universe, as opposed to focusing solely on income.

It’s interesting to see how it’s changed over the past few years, and it tells a story about what’s going on in the industry and what’s trending. I’ll give a few stats, because I think these are sort of interesting to think about. Historically, this fund has had higher allocation to fixed income. We’ve seen that shift toward equities over the past few years. Since 2019, its fixed income allocation actually decreased from 75% to less than 50% now.

In 2019, also eight out of 10 of its top holdings were fixed income. Now only one out of its top 10 is a fixed income holding. A lot higher equity allocation. It’s actually driven a lot by the weight of several newer BlackRock funds that have been launched over the past few years. So some of these tickers are BMEZ, BTX, BSTZ, BUI, which are all mostly tech and growth oriented.

Another sort of interesting stat here is, since 2019, allocation to BlackRock funds increased from 20% to 32%. So a lot of significant change over the past few years. A lot of opportunity to capture some of those growth investments in the close-end fund world.

Chuck Jaffe: But as I understand the PCEF, part of what is there is how it comes up with its weightings. In other words, how it decides what it’s doing. And while we called it, as you point out, tongue in cheek, the S&P 500 of the closed-end fund world, the truth is, anytime we’re looking at anything that’s even remotely based on an index, index construction matters. In an area like closed-end funds, which, as you noted, is watching a lot of new entrants come in, and some of those new entrants are skewing towards the equity side, etc. 

Talk a little bit about the methodology here and why the methodology continues to work for the PCEF.

Roxanna Islam: The weighting methodology is pretty interesting. I would call it an active approach to passive, if that makes sense. It excludes funds with premiums or discounts greater than 20% of the fund average. Also, it weighs funds with higher discounts with a higher factor versus those that premiums, which get a lower factor. Basically, it’s replicating buying at discounts, selling at premiums.

I think this is pretty interesting, because when you look at a lot of its peers, it has an index peer, YYY, then it has a few other active ETFs of closed-end funds. Those are mostly income plays. And while PCEF does provide income, its main focus is  taking that broad view of the universe and getting income from that.

It sort of demonstrates just how well passive works and indexing works. I think it sort of takes out some of the emotion behind it as well.

Chuck Jaffe: In terms of it being the bellwether for the closed-end fund space — why is it important that the closed-end fund space have one? Closed-end funds are such a unique kind of investment area where you can say, I’m going to go buy this thing at a discount, or what have you. Why is it an important fund for the rest of the closed-end fund world to — even if you’re not using ETFs to do it — to have this as a benchmark?

Roxanna Islam: I talked about how it was important for ETFs, but it’s also very important for closed-end funds. It’s the first and only passive benchmark for closed-end funds. The passive approach to the market often wins over active. If you look at the distribution rate for PCEF, it’s stayed relatively high compared to its peers.

Right now, it’s in the high 8% range. And as I mentioned before, income is very important for these closed-end funds. Even without solely focusing on income as a selection or weighting methodology, PCEF still provides that higher income that you find with these closed-end funds, just by taking this broad view of the universe.

And, it’s very important for some closed-end fund investors who use this as a core holding. They of have this core holding, kind of like the S&P 500, like I mentioned, and then pick and choose individual closed-end funds as a tactical approach. And it’s also good for the newer closed-end fund investor who may not be so comfortable picking individual ones, but have a portfolio of ETFs. They might appreciate the diversified access that this ETF offers them into the closed-end fund world.

Chuck Jaffe: It does have competitors out there. In fact, it’s the PCEF, but the CCEF is a closed-end fund of funds from Calamos. And the FCEF is a closed-end fund of funds from First Trust. And you mentioned the YYY. So, if somebody is going to look at any of those, a proxy for the closed-fund space, how similar or different are they? And is this the one that you prefer because you like this methodology best? Or is it more because this is the oldest one, so you have the longest benchmark time?

Roxanna Islam: I think you hit a couple of good points. It’s the oldest one. It has the most holdings out of its peers. And, if you look at YYY, for example, that’s its only other indexed peer. And that’s an Amplify ETF product, by the way. It does have some overlap, and then if you look at its active peers, it has less overlap.

So you could technically use a multiple of these ETFs to get an even more comprehensive view of the closed-end fund space.

Chuck Jaffe: It’s the PCEF, the Invesco Closed-End Fund Income Composite ETF. Roxanna, thanks so much for joining me on The Navigator to talk about it!

Roxanna Islam: Thanks for having me, Chuck! 

Chuck Jaffe: The Navigator is a joint production of the Active Investment Company Alliance and Money Life with Chuck Jaffe. And yeah, I’m Chuck Jaffe. Please check out my show on your favorite podcast app, or by going to MoneyLifeShow.com. To learn more about interval funds, closed-end funds and business development companies, go to aicalliance.org. That’s the website for the Active Investment Company Alliance.

Thanks to my guest, Roxanna Islam. She’s the head of sector and industry research at VettaFi. And you can dig into the firm’s research at VettaFi.com.

The Navigator podcast is new every Friday. Make sure you don’t miss an episode by following along on your favorite podcast app. And if you like this podcast, leave a review or tell your friends about it, because that stuff really does help.

We’ll be back with more closed-end fund fun next week. And until then, happy investing everybody!

For more news, information, and analysis, visit the Innovative ETFs Channel.