1. What's A Closed-End Fund Anyway?

Closed-end funds (CEFs) may be one of the best-kept secrets of the investing world. In a 2018 Forbes Insights survey of more than 1,000 investors, the majority reported that their advisors never discussed CEFs and less than 9% reported owning one. This may be a missed opportunity for both investors and advisors, since most investors also said it’s valuable when advisors suggest investments they haven’t considered. 

Like their better-known, open-end cousins, CEFs offer instant diversification and relatively high liquidity. There are both CEFs and open-end mutual funds available for a wide variety of asset classes and investment strategies. The big difference? CEFs typically offer higher income. 

Open-end funds must create new shares every time a shareholder invests. And when shareholders sell their shares, managers must have cash on hand to buy back the shares at their current net asset value. As a result, managers may end up scrambling to invest large inflows or selling off assets at unattractive prices to meet redemptions.

Closed-end funds raise capital through an initial public offering (IPO) and the shares then trade on an exchange, like a stock. (After the IPO, a CEF doesn’t issue more shares—hence it’s “closed”). Because the funds aren’t issuing or redeeming shares, they have a relatively stable asset base, enabling managers to focus on strategy and remain fully invested throughout market cycles.





Unlike open-end mutual funds, CEFs can employ leverage—and 72% of them do. And a more stable asset base provides CEF managers with greater freedom to invest in less liquid, potentially higher-yielding assets. 

CEFs are designed to provide consistent and predictable distributions, and many of them deliver on that promise. 







Like open-end mutual funds, CEFs carry risks associated with their underlying investments. In addition, CEFs can use leverage, which increases their volatility. Both gains and losses are amplified. 

Yet research from Nuveen shows that over longer periodsthree to five years, for instanceleverage has historically delivered incremental income that has more than compensated for the associated cost and added volatility. Thus, CEFs tend to reward longer-term investors.  






CEFs often appeal to investors who are nearing retirement and “seeking income and cash flow to maintain their lifestyle,” says David Lamb, managing director in Nuveen’s Global Products Group.  

But more than half of CEF holders are under age 60, according to a Forbes Insights survey of financial advisors. Because CEFs offer portfolios in many of the same asset classes as open-end funds, they may be a smart choice for an investor who wants to boost income while maintaining portfolio diversification.



Many of the criteria advisors use to choose a CEF are similar to what’s considered when selecting an open-end fund, such as manager quality and expense levels, says Lamb. But many CEF investors are seeking high and predictable income, so they pay close attention to whether the distribution rate appears sustainable. 



*Source: Morningstar, Bloomberg, as of 12/31/2018. Past performance does not guarantee future results. The hypothetical example above is for illustrative purposes only, and is not intended to represent the results of any Nuveen closed-end fund. Other methods and market conditions may result in significantly different outcomes. A closed-end fund’s use of leverage creates the possibility of higher volatility for the fund’s per share net asset value (NAV), market price, distributions and returns. There is no assurance that a fund’s leveraging strategy will be successful. This illustration uses the Bloomberg Barclays Municipal Bond Index as a proxy for the hypothetical investment portfolios; the SIFMA Municipal Swap Index, which began in July 1989, only as a proxy for the hypothetical leveraged portfolio’s cost of leverage; and a 35% leverage ratio for the hypothetical leveraged portfolio. The returns shown assume reinvestment of dividends and do not reflect any applicable sales charges. It is not possible to invest directly in an index.


Nuveen Securities, LLC, member FINRA and SIPC


EWB-950432PR-Y0919X

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Closed-end funds (CEFs) may be one of the best-kept secrets of the investing world. In a 2018 Forbes Insights survey of more than 1,000 investors, the majority reported that their advisors never discussed CEFs and less than 9% reported owning one. This may be a missed opportunity for both investors and advisors, since most investors also said it’s valuable when advisors suggest investments they haven’t considered. 

Like their better-known, open-end cousins, CEFs offer instant diversification and relatively high liquidity. There are both CEFs and open-end mutual funds available for a wide variety of asset classes and investment strategies. The big difference? CEFs typically offer higher income. 

Open-end funds must create new shares every time a shareholder invests. And when shareholders sell their shares, managers must have cash on hand to buy back the shares at their current net asset value. As a result, managers may end up scrambling to invest large inflows or selling off assets at unattractive prices to meet redemptions.

Closed-end funds raise capital through an initial public offering (IPO) and the shares then trade on an exchange, like a stock. (After the IPO, a CEF doesn’t issue more shares—hence it’s “closed”). Because the funds aren’t issuing or redeeming shares, they have a relatively stable asset base, enabling managers to focus on strategy and remain fully invested throughout market cycles.





Unlike open-end mutual funds, CEFs can employ leverage—and 72% of them do. And a more stable asset base provides CEF managers with greater freedom to invest in less liquid, potentially higher-yielding assets. 

CEFs are designed to provide consistent and predictable distributions, and many of them deliver on that promise. 







Like open-end mutual funds, CEFs carry risks associated with their underlying investments. In addition, CEFs can use leverage, which increases their volatility. Both gains and losses are amplified. 

Yet research from Nuveen shows that over longer periodsthree to five years, for instanceleverage has historically delivered incremental income that has more than compensated for the associated cost and added volatility. Thus, CEFs tend to reward longer-term investors.  






CEFs often appeal to investors who are nearing retirement and “seeking income and cash flow to maintain their lifestyle,” says David Lamb, managing director in Nuveen’s Global Products Group.  

But more than half of CEF holders are under age 60, according to a Forbes Insights survey of financial advisors. Because CEFs offer portfolios in many of the same asset classes as open-end funds, they may be a smart choice for an investor who wants to boost income while maintaining portfolio diversification.



Many of the criteria advisors use to choose a CEF are similar to what’s considered when selecting an open-end fund, such as manager quality and expense levels, says Lamb. But many CEF investors are seeking high and predictable income, so they pay close attention to whether the distribution rate appears sustainable. 



*Source: Morningstar, Bloomberg, as of 12/31/2018. Past performance does not guarantee future results. The hypothetical example above is for illustrative purposes only, and is not intended to represent the results of any Nuveen closed-end fund. Other methods and market conditions may result in significantly different outcomes. A closed-end fund’s use of leverage creates the possibility of higher volatility for the fund’s per share net asset value (NAV), market price, distributions and returns. There is no assurance that a fund’s leveraging strategy will be successful. This illustration uses the Bloomberg Barclays Municipal Bond Index as a proxy for the hypothetical investment portfolios; the SIFMA Municipal Swap Index, which began in July 1989, only as a proxy for the hypothetical leveraged portfolio’s cost of leverage; and a 35% leverage ratio for the hypothetical leveraged portfolio. The returns shown assume reinvestment of dividends and do not reflect any applicable sales charges. It is not possible to invest directly in an index.


Nuveen Securities, LLC, member FINRA and SIPC


EWB-950432PR-Y0919X

Forbes Insights is the strategic research and thought leadership practice of Forbes Media. By leveraging proprietary databases of senior-level executives in the Forbes c...