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ETF Specialist

Seeking More Portfolio Income?

We take a closer look at the only ETF offering a broad portfolio of income-producing closed-end funds.

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Given the persistent low interest rates, many investors are seeking ways to increase their portfolios' income generation. Closed-end funds can help in this regard for two principal reasons. First, because CEFs trade intraday on a stock exchange, their prices can deviate from their underlying net asset values by trading at discounts or premiums. If a fund offers a 10% distribution rate computed at NAV, investors can realize more than 10% if they can buy the fund at a discount to NAV. Second, many CEFs employ leverage, which the 1940 Investment Company Act prohibits for open-end mutual funds and exchange-traded funds; when used properly, leverage can benefit the performance and distribution rate of CEFs.

However, because CEFs are largely misunderstood in the marketplace, investors often shy away from investing in them. A fund's discount or premium to NAV can increase investor uncertainty. The distribution rate may include return of capital, which can render the published "yield" misleading. Leveraging a portfolio not only provides potential upside reward but also heightens volatility. Such concerns (and we've only scratched the surface) can offset any potential investor interest that the higher potential income generation of CEFs provides, causing investors to seek income from other, more stable sources.

Mike Taggart does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.