The 10 best closed-end funds (CEFs) for 2021

Even the best closed-end funds (CEFs) don't get much media attention. That's OK. Strong results and typically high distributions are reward enough.

  • By Michael Foster,
  • Kiplinger
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A dreadful 2020 for most of the world is mercifully over. But while investors have plenty of hope for 2021, many still have some trepidation. Fortunately, the market's best closed-end funds (CEFs) – an often overlooked corner of the market – can provide many of us with a solution.

While the head of steam from late 2020 has many confident about this year, some are worried that a 2021 rally is already fully priced in. Meanwhile, downside risks are prevalent. For instance, the vaccine rollout has been slower than anticipated, and Joe Biden's 100 million shots in his first 100 days as president might be a moonshot we don't hit.

Then there are the 7 billion people who live outside of the U.S., many of whom are unlikely to get the shot in the first half of 2021, or even this year at all.

By the way, what exactly does the post-vaccine world look like? Have consumers changed their habits? If so, how? How many people will go back to Main Street to eat, drink and shop? Are we at the cusp of a new roaring '20s, or will fear and uncertainty be a drag on growth? Will a bigger financial catastrophe ensue in the coming months, forcing businesses that have struggled for over a year to finally throw in the towel?

Investors consumed by those uncertainties can lean on the stable income provided by some of the market's best CEFs. You can learn more about how they work in our closed-end funds primer, but in general, while performance might ebb and flow, CEFs can help balance that performance out with a steady flow of typically robust payouts many times higher than the broader market.

Here are 10 of the best CEFs to buy for 2021. In my work as head research analyst and writer for CEF Insider, I constantly scour the market for the best opportunities in closed-end funds. A few of the following CEFs play on the prevailing themes of the coming year, while others are contrarian bets that still bear consideration giving management's excellent track records. That can make them invaluable tools for income investors looking to make hay of the coming year, no matter what happens.

Data is as of Jan. 27. Distributions can be a combination of dividends, interest income, realized capital gains and return of capital. Distribution rate is an annualized reflection of the most recent payout and is a standard measure for CEFs. Fund expenses and discounts/premiums to net asset value (NAV) provided by CEF Connect.

BlackRock Science and Technology Trust

Market value: $1.3 billion

Distribution rate: 4.2%

Expenses: 0.92%

This list of the best CEFs for 2021 is going to be a little heavy on the technology side. That might seem counterintuitive given the "smart money's" focus on value for 2021, but these funds should not only be resilient this year, but fruitful for many years to come as technology continues to dominate daily life.

The BlackRock Science and Technology Trust (BST) is the first such tech-oriented fund worth considering, in part because of its tremendous track record. The BST has produced a 311% total return (price plus distributions) since inception in late 2014 – that's not only better than the S&P 500's (.SPX) 117% return in that time, but better than the 217% return of the tech-heavy Nasdaq (.IXIC), and the 269% return of the Technology Select Sector SPDR ETF (XLK).

The secret behind that outperformance is management's aggressive tech selections. While the top holdings include blue chips such as Apple (AAPL) and Microsoft that appear at the top of cap-weighted tech funds, you also get decent weights in still large but more emergent holdings such as Twilio (TWLO), C3.AI (AI) and Square (SQ).

This strategy is likely to be a long-term winner over time. But its prospects could be better than many expect in 2021 if a slow vaccine rollout and mutant COVID-19 strains extends a heavier-than-normal dependence on the companies BST holds.

BlackRock Science and Technology Trust II

Market value: $2.8 billion

Distribution rate: 3.9%

Expenses: 1.30%

That said, even if the Joe Biden administration is able to ramp up the vaccine rollout and we go back to something more closely resembling a pre-pandemic world, certain habits – such as working from home and ordering groceries online – aren't just going to immediately snap back to pre-pandemic levels.

And thus, the internet will continue to be an important place for companies to attract attention and customers.

Technology really is in a "heads I win, tails I win too" situation with regards to the future, which is why BST and the BlackRock Science and Technology Fund II (BSTZ) are great CEF options for 2021.

While BST skews more toward traditional, large-cap companies, BSTZ's average market cap is a bit smaller, and it's also more internationally focused (about 60% U.S. stocks versus 70% for BST). Top holdings include not just C3.AI, but also Farfetch (FTCH), U.K. electric vehicle company Arrival and social app Snap (SNAP).

This CEF also goes farther than BST with a lot of private equity bets that provide it access to up-and-coming companies that BST is too big to dig into. That has helped BSTZ roughly double in value since late 2018 inception, and helped it hike its distribution by 15% in late 2020.

AllianzGI Artificial & Technology Opportunities Fund

Market value: $927.1 million

Distribution rate: 5.6%

Expenses: 1.34%

Like BST and BSTZ, the AllianzGI Artificial & Technology Opportunities Fund (AIO) is a relatively low-yielding tech CEF – though its 5.6% yield is better than both BlackRock offerings. Over the past year, this young fund has outperformed the Nasdaq Composite by more than 3 percentage points.

Importantly, AIO currently trades at 3% discount to its net asset value. A hallmark of CEFs is that their limited number of shares means that at times, they can trade at premiums or discounts to their NAV. So at the moment, you can buy the assets in AIO for, effectively, 97 cents on the dollar.

AIO has a surprisingly diversified and value-driven investment strategy. While highflying tech companies like NXP Semiconductors (NXPI) and Roku (ROKU) are top holdings, the company's third and fourth biggest positions – Microsoft (MSFT) and Deere (DE) – are much more value-driven. In fact, AIO has mixed a high-tech portfolio with some non-tech companies – UnitedHealth Group (UNH) is another big position – which looks odd, considering its name, but it gives the portfolio a well-rounded flavor that is compelling to an investor who wants strong returns but also a little diversification.

What's most admirable about AIO's portfolio is what it says about management and how it views the world. It understands that technological innovations aren't the exclusive domain of technology companies. Firms such as UNH, who uses artificial intelligence (AI) to optimize its margins by lowering insurance claims, are also beneficiaries of technology and need to be bought accordingly when they're the most beaten up.

AIO is a unique fund that combines the best of value investing and growth investing at a time when too many people pit the two against each other, and that makes it one of the best CEFs for 2021, and perhaps long after that.

Columbia Seligman Premium Technology Growth Fund

Market value: $458.0 million

Distribution rate: 6.4%

Expenses: 1.15%

Columbia Seligman Premium Technology Growth Fund (STK) is relatively small but it's hardly overlooked, given a five-year average premium to NAV of about 3%. But fortunately for new money, STK now trades at a small 2% discount to NAV, providing an excellent entry point for someone looking to buy tech assets slightly on the cheap, and with a strong distribution rate.

The portfolio's focus on large and reliable tech companies has helped it be a strong wealth creator for years: STK's top holdings in Lam Research (LRCX), Apple, and Teradyne (TER) belie a management style focused on well-established long-term growth prospects rather than the more aggressive speculation found at the margins of BST, or more centrally in BSTZ.

That does mean less price upside for investors – performance falls somewhere in between the Nasdaq-100 and the S&P 500 since inception in late 2009. But importantly, it provides a lot of performance in the form of regular distributions. Not only has STK never cut those distributions, but it has even delivered the occasional special distribution.

If you want exposure to the tech sector but prefer a more conservative portfolio, STK might be one of the best CEFs for your consideration.

BlackRock Enhanced Equity Dividend Trust

Market value: $1.6 billion

Distribution rate: 7.2%

Expenses: 0.87%

If you're looking for CEFs that really start to live up to their high-yield reputations, you'll want to look toward funds such as the BlackRock Enhanced Equity Dividend Trust (BDJ).

BDJ, with a 7%-plus yield on a distribution that actually went up in 2019, has been gaining investor confidence. A discount to NAV that widened all the way to 23% in 2020 has since narrowed down to about 10% – still a nice discount, but proof that investors are starting to rediscover this fund.

BlackRock Enhanced Equity Dividend Trust is certainly not a technology fund – while the sector is third at about 13% of assets, financials (28%) and healthcare (18%) are much larger pieces of the pie. Its larger holdings include the likes of Citigroup (C), Verizon (VZ) and Bank of America (BAC), all above 3% each.

Its diversification across the economy makes it a compelling CEF bet for 2021, especially if you'd like some contrarian holdings that might accelerate their rebounds this year.

Pimco Dynamic Income Fund

Market value: $3.1 billion

Distribution rate: 10.2%

Expenses: 3.71%*

Closed-end funds can certainly deliver much more yield than 7%, of course, but you have to get a little more exotic, and take on a bit more risk.

One of the best high-yielding CEFs for 2021 could be the Pimco Dynamic Income Fund (PDI). This actively managed fund is overseen by one of the largest bond buyers in the world: Pimco, whose $1.9 trillion in assets makes it a major market mover. That position has helped Pimco (and PDI) gain access to bonds and derivatives that most market players can't access.

In turn, that edge should ensure Pimco remains one of the bond market's dominant players.

PDI's strong yield is generated by more than just its portfolio of mortgage-related instruments, investment-grade corporates, junk bonds, EM debt and other issues, but high leverage. Closed-end funds are allowed to take out debt to invest even more money into their selections – a tactic that can lead to more volatile results, sure, but also higher distribution rates and returns.

Pimco Dynamic Income Fund has put up remarkable returns compared to your average bond fund – a roughly 192% total return since 2012 inception versus 31% for the Bloomberg Barclays US Aggregate Bond Index. That performance hasn't come in nearly as straight a line, but PDI has made up for it by delivering occasional payout growth and special distributions.

* Includes a 1.99% baseline expense and 1.72% in interest expenses.

Cohen & Steers Quality Income Realty Fund

Market value: $1.7 billion

Distribution rate: 7.8%

Expenses: 2.00%*

A contrarian play of 2021 is in real estate. While some people expect a rebound as more people get vaccinated and get out of their homes, the pandemic taught the world that a lot of office space is unnecessary, and that some of America's physical store footage is superfluous.

That has some people wondering what's going to happen to all those office buildings and strip malls.

Whatever will happen, it seems pretty clear that a lot of real estate holders are set for bankruptcy – which is why real estate investment trusts (REITs) were one of the worst sectors of 2020, and one of the slowest to recovering.

But that makes REITs compelling now – or at least the babies that are being thrown out with the bathwater are. Not all real estate is going to go fallow for years, and really good real estate investors will know which is which.

That makes the Cohen & Steers Quality Income Realty Fund (RQI) one of the best CEFs for 2021 – well, if the REIT market rebounds.

The strongest performer of all CEFs in 2019, RQI has a tremendous track record; since its inception in 2002, RQI has returned 426% to beat the SPDR Dow Jones REIT ETF's (RWR) 372%. Currently, the fund holes a good blend of infrastructure, self-storage, healthcare, industrial and other real estate, led by American Tower (AMT), Public Storage (PSA) and Welltower (WELL).

Better still, it trades at a tidy 5% discount to NAV. Compare that to a premium it fetched through much of the late 2010s because its portfolio kept crushing the real estate market. Credit goes to management's acumen for that.

* Includes a 1.11% baseline expense and 0.89% in interest expenses.

Cohen & Steers REIT and Preferred and Income Fund

Market value: $1.1 billion

Distribution rate: 6.7%

Expenses: 1.96%

Similar to RQI, the Cohen & Steers REIT and Preferred and Income Fund (RNP) has a strong portfolio of high-performing real estate that's hand-picked by a management team who knows the industry.

Unlike RQI, RNP is diversified out of REITs by including preferred stocks in other sectors (mostly finance) to help it in thin years for real estate. The CEF's 6.7% yield isn't quite what you get from RQI, but it's a dependable monthly payout stream that has never been cut, not even during the 2007-09 financial crisis nor the 2020 bear market.

Instead of being rewarded with a premium for its historical strength and reliable payouts, RNP trades at a 4% discount to NAV. If real estate recovers quickly, the discount on this CEF should disappear.

BlackRock Muniyield Quality Fund II

Market value: $317.8 million

Distribution rate: 4.6%

Expenses: 2.29%*

Amid 2020's counterintuitively strong year for stocks, you might be concerned that equities across the board are in for an eventual correction, and you might want to diversify into bonds.

Tax-free municipal bonds are one strong option, and the 4.6%-yielding BlackRock Muniyield Quality Fund II (MQT) is one of the better options out there for you.

Importantly, this is a high-quality portfolio; more than 90% of holdings are investment-grade, including nearly 80% in A-rated bonds or better. Instead, its relatively high yield distribution rate (remember that municipal bond yields are lower than most other bonds, but make up for it through tax exemptions) is a result of a high (37%) use of leverage.

Meanwhile, you can get these municipal bonds for roughly 95 cents on the dollar at present.

* Includes a 0.92% baseline expense and 1.37% in interest expenses.

Pimco Municipal Income Fund

Market value: $369.7 million

Distribution rate: 4.6%

Expenses: 1.91%*

The Pimco Municipal Income Fund (PMF) yields a similar 4.6%, but it certainly does not trade at a discount at the moment. In fact, it very rarely does. PMF has traded at a premium to NAV for most of its history, and the only consolation is that its current 6% premium is less than its five-year average of about 9%.

For a long while, that premium was in part justified by its long history of stable distributions. But then, PMF cut payouts for the first time in early 2017, then again last year.

The upside? Pimco Municipal Income now offers a much more sustainable payout, and despite those cuts, it has delivered superior total returns to its rivals – it has returned 106% over the past decade, roughly doubling the 54% return of the iShares National Muni Bond ETF (MUB) in that same time.

This is still a Pimco bond product, which alone makes it worthy of a closer look. And again, despite its payout declines, it has delivered solid performance over the long term. That makes PMF one of the best CEFs for income investors not just in 2021, but farther down the road.

* Includes a 1.17% baseline expense and 0.74% in interest expenses.

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