Closed-end funds have been around for more than 100 years. However, their use is now overshadowed by their exchange-traded fund peers. But the propensity to offer large discounts to net asset values and the ability to use leverage should cause institutional investors to take a second look.
A small piece of the ETP pie: With about $250 billion in assets, U.S. CEFs are a fairly small investment vehicle. Currently, municipal fixed-income CEFs represent about a third of assets. The other core strategy is U.S. equities.
Seize the discount: In times of market stress, CEFs start to trade at significant discounts to their NAVs. This provides nimble investors an arbitrage opportunity or long-term investors a great entry point into a fund.
Opportunities: At the height of the COVID-19 panic, market prices fell much further and faster than net asset values. At one point, the iShares National Muni Bond ETF offered a 5.8% discount and the Nuveen AMT-Free Quality Municipal Income CEF offered a 23.1% discount.
Levering up: Many CEFs employ modest leverage. Given negative real interest rates, it is increasingly becoming necessary to think about employing it to achieve investors' return objective. However, there is no free lunch and leverage often comes with increased volatility.
*Includes only U.S. CEFs with over $100 million in assets. Source: Bloomberg LP
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September 07, 2020 at 11:00AM
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