Best Closed-End Funds (CEFs) to Buy

The best closed-end funds will significantly boost your portfolio income and allow you to buy their underlying stocks and bonds at a discount.

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By Charles Lewis Sizemore, CFA

If someone offered to sell you a dollar for 90 cents . . . well, you’d probably think it was too good to be true. Yet these are exactly the kinds of opportunities that arise in the market’s best closed-end funds (CEFs).

CEFs are a type of investment fund, and in fact, they are older than mutual funds. The very first closed-end fund was launched in 1893 – more than 30 years before the first traditional mutual funds (like those you might find in your 401(k) plan) were created.

As with their mutual fund cousins, CEFs are pooled investment vehicles that hold portfolios of stocks, bonds or other assets. But that’s where the similarities stop.

Mutual funds are open-ended. When you want to invest, you or your broker sends cash to the fund, and the manager takes that fresh cash and uses it to buy assets. When you want to sell, the manager will sell a small amount of assets to cash you out. Money is always coming and going, and there’s no hypothetical limit to the amount of new money a popular fund can take in and invest.

Kiplinger

Closed-end funds are different. CEFs have initial public offerings (IPOs) like stocks, and there is a fixed number of shares that then trade on the stock market. If you want to buy shares, you buy them the same way you’d buy a stock.

And here’s where the fun starts. CEF prices are set by the market the same way a share of Apple (AAPL) or Amazon.com (AMZN) would be, but that price can vary wildly from the value of the assets the fund holds. It’s not uncommon to see CEFs trading at a premium to the value of the assets they own. But just as you’d never pay $1.10 for a dollar, you’re generally better off avoiding CEFs trading a premium.

Discounts, however, are another story. Closed-end funds often sell at massive discounts to net asset value (NAV). In these cases, they’re effectively worth more dead than alive!

Another nice aspect of CEFs is that, unlike mutual funds, they can use debt leverage to juice their returns. That same leverage also allows closed-end funds to sport some of the highest yields you’re likely to find.

Today, we’re going to take a look at some of the best CEFs on the market. Each of these funds trades at a reasonable discount to NAV and offers a yield that’s at least competitive, if not downright extravagant.

Data is as of November 24. Distribution rate is an annualized reflection of the most recent payout and is a standard measure for CEFs. Distributions can be a combination of dividends, interest income, realized capital gains and return of capital.

Nuveen Real Estate Income Fund

Market value: $284.0 million

Distribution rate: 7.2%

Discount to NAV: -4.3%

Expenses: 3.64%*

It’s been a rough stretch for real estate investment trusts (REITs). Because REITs have always had a major emphasis on income, investors came to view them as a bond substitute over the past two decades. But when bond yields surged in 2023 – and bond prices collapsed – REIT prices also fell in sympathy. 

But now that prices in the sector have reset, investors have a chance to buy quality real estate assets on the cheap. And there’s an inflation angle as well. Land and building prices tend to at least keep pace with inflation over time, and commercial rental contracts will generally have rent escalators that will rise.

REITs are a fine way to get exposure to real estate. But why pay retail for them if you don’t have to?

The Nuveen Real Estate Income Fund (JRS, $7.67) is one of the best closed-end funds that invests in REITs. It owns essentially the same collection of REITs you’d expect to find in any mutual fund or exchange-traded fund (ETF), such as logistics REIT Prologis (PLD), data center REIT Equinix (EQIX) or self-storage operator Public Storage (PSA), but it has the added benefit of owning them at a discount.

At current prices, JRS trades at a 4.2% discount to NAV, which is wide given this CEF’s history. It also yields a very juicy 1.5%.

The Fed might be successful in bringing inflation to heel. Or we might see several more quarters of sticky inflation. Only time will tell. But either way, it makes sense to own a little real estate, and JRS is a smart way to do so.