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By Scott Burns | 03-26-2010 04:22 PM

A Diversified Way to Buy Closed End Funds

Investors attracted to the yields on closed end funds now have a more liquid way to buy into the sector: ETFs.

Securities mentioned in this video
PCEF PowerShares CEF Income Composite

Scott Burns: Looking for a diversified way to purchase closed-end funds? ETFs to the rescue. Hi there, I'm Scott Burns, director of ETF research with Morningstar. Joining me today is Ben Fulton, who heads up the PowerShares ETF group. Ben, thanks for joining me.

Ben Fulton: Thanks, Scott.

Burns: So you've launched a new closed-end fund ETF, and it's a fund of closed-end funds, the first of its kind out there. Can you tell us about it a little bit starting with the ticker?

Fulton: Sure, yeah. The ticker, hopefully easy to remember, PCEF, so PowerShares Closed-End Fund. ETF. It's made up of about 75 closed-end funds represented between option income funds, investment-grade, and high-yield--pretty much equally weighted between those three areas.

Burns: So, what does it leave out? I guess that's the big question.

Fulton: Well, for sure it leaves out all the municipal bond funds; these [holdings] are all the taxable side of the equation. And it leaves out the single-country closed-end funds that are out there.

Burns: Or they could always buy another ETF if they want that.

Fulton: Yeah. The ETF world has done a very good job in that area.

Burns: Folks are clearly interested in closed-end funds, and I think that's really being driven by this secular drive for yield, because we're basically in a no-yield environment. I know you guys just recently priced the yield on PCEF, so what'd it come out at?

Fulton: Well, it's a little over eight and a quarter.

Burns: Eight and a quarter.

Fulton: Yeah. So it's high-yield because you've got some leverage employed into it. So ETFs typically are not, by themselves, going to have leverage, but in this case here, we're having leverage because the closed-end funds may have that.

So it's an opportunity to, if you're looking for a yield play or if you're looking at the closed-end fund space and you realize there's relative value there that you like, but you can't figure out which one do you want to own, this is the way for you to own what we hope is a higher-yielding product with good representation across closed-end funds.

Burns: Why people generally like ETFs versus closed-end funds is because the ETFs trade very close to the NAV, whereas closed-end funds have that historical premium-discount issue. As an ETF investor, does the fact that the things in the underlying in the ETF have premium discount issues, is that troublesome for the ETF portion of it?

Fulton: Well, it could be troublesome if an investor does not monitor and watch that. I mean, you want to be able to look and see. But it's actually now hopefully going to be the easiest way for you to identify what is what we'll call the broad market, the beta of closed-end funds, how are they trading, are they at a premium or a discount? So it can be an opportunity. What I always say is if you can identify risk, then you can make it an opportunity.

Burns: Right.

Fulton: Unidentified risk is definitely a riskier portfolio.

Burns: So can investors find the stats for what the average premium or discount is of the portfolio? Can they find that on the PowerShares site?

Fulton: The PowerShares site's going to have the sum of the information S-Network, who is the index provider that created it, even has a more robust index site that can provide a lot more historical and background data on the index itself.

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