What Closed-End Funds Could Offer Amid Uncertain Times

Earlier this week, the latest CPI report showed that consumer prices haven’t been stung by inflation as sharply as previously expected. However, it is probably far too soon to celebrate. 

For now, many businesses have managed to use their backlog of goods to mitigate exposure to volatile tariff negotiations. Once those backlogs run dry and more imports are required, import costs could get passed on to consumers.

Inflation worries aren’t the only factor affecting the global markets. Tariff threats are continuing to rattle the value of a number of tried-and-true international investment solutions. Bond investors are still evaluating when the Federal Reserve will begin trimming interest rates again. Additionally, rapidly escalating tensions in the Middle East are sending shocks through the global markets. 

In this time of market turmoil, it may be more crucial than ever to focus on building a well-diversified portfolio. One potentially advantageous method for fostering a diversified asset pool is through the use of closed-end funds (CEFs). 

Unlike a traditional mutual fund, closed-end funds generate a specific amount of shares during its initial public offering. Investors can still buy and sell closed-end fund shares on exchanges, but the fund will not create any new shares after its IPO. 

From there, closed-end fund managers will use the IPO money to invest in a wide variety of securities. These securities can include stocks, bonds, and even alternative securities such as commodities or real estate. As such, investors could use closed-end funds as a one-stop shop to gain access to specific investment strategies, along with alternative investments that are normally tricky to attain. 

There are additional reasons that advisors should consider picking up closed-end funds right now. To start, the current macroeconomic conditions have led to higher demand for strategies that can bolster a portfolio with competitive yield. Luckily, closed-end funds can offer highly competitive distribution opportunities. 

Notably, closed-end funds can offer distributions through a number of different opportunities. Depending on the assets within the fund’s portfolio, advisors could tap into income from dividends, interest, bond yields, capital gains, and more. 

One of the more significant advantages of closed-end funds lies in how advisors can pick up these funds at compelling discounts. By carefully picking up discounted closed-end funds, advisors can tap into yield, asset diversity, and potential capital appreciation within a single purchase. However, these ongoing force multipliers of global volatility have made some worry that attractive closed-end fund discounts will be a thing of the past. 

Luckily, it seems discounted closed-end funds will remain in play for now. A recent analysis from the experts at Nuveen highlighted that many closed-end funds continue to offer appealing opportunities for discount-savvy buyers. 

“While we might have expected discounts to widen amid the more uncertain macroeconomic environment and elevated volatility, most CEFs saw little change in their rating over the month, with discounts remaining quite resilient – as they were in March,” the Nuveen report added. “CEF discounts generally remain quite tight relative to their 12 month means and many funds currently trade closer to their longer-term average discount levels.”

If the first two weeks of June have been any indication, macroeconomic uncertainty won’t be going away any time soon. However, despite all the noise, closed-end funds continue to offer portfolio diversification, compelling income, and long-term returns, potentially even at a discount. As such, advisors may want to keep an eye out for opportunities to bolster their CEF exposure in the days to come. 

A message from Advisor Perspectives and VettaFi: To learn more about this and other topics, check out our most recent market outlooks.