Closed-ends in an ETF wrapper

Since closed-end funds sell a limited number of shares, they're subject to supply and demand—which is of interest to ETFs.

  • By Bailey McCann,
  • The Wall Street Journal
  • Investing in ETFs
  • Exchange-Traded Funds
  • Investing in ETFs
  • Exchange-Traded Funds
  • Investing in ETFs
  • Exchange-Traded Funds
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Closed-end funds are gaining popularity as a menu option for exchange-traded funds.

Closed-ends are a type of mutual fund that issue a set number of shares that then trade on an exchange—different than the more-familiar “open end” mutual funds. They provide exposure to a range of assets at a relatively steady share price, and many deliver income to investors. But the funds also often trade at a premium or discount to the value of their holdings. This happens because of the limited number of shares, hence the fund share prices are subject to supply and demand.

ETFs to diversify your portfolio

These ETFs span a focused range of equities, fixed income, and assets.

This is what makes them of particular interest to ETFs.

Last year, the hedge fund Saba Capital, an investor in individual closed-end funds, launched Saba Closed-End Funds ETF (CEFS). This ETF uses the parent hedge fund’s research process to identify closed-end funds trading at a significant discount. Once identified, the funds are added to the ETF’s index. From there, investors, in theory, benefit by capturing higher yields as prices go up.

In some cases, Saba’s investment team will also take an activist stance and push individual closed-end funds in which it invests to help reduce gaps in pricing, for example with share buybacks to lift the value of its shares. “Our goal with the ETF is to get the best yields, just as we do with our institutional fund,” says Leah Jordan, vice president at Saba Capital. “The ETF structure allows us to open up our strategy to a wider range of investors.”

CEFS recently passed its first anniversary. As of May 30, it had a distribution yield of 8.29% and a cumulative return since inception of 11.7%, one of the top performers in the closed-end ETF category.

Another ETF provider, Amplify ETFs, offers an option for passive investors that can be used as a core part of a portfolio. YieldShares High Income ETF (YYY) tracks the ISE High Income Index, an index of the highest-yielding closed-end funds.

Both ETFs have taken steps to mitigate issues that might have an impact on yields, such as rising rates. Brian Giere, director at Amplify ETFs, says index investing can help insulate income-generating parts of a portfolio because the broad index won’t be as severely affected during a rising-rates environment as would exposure to a single fund.

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