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Income-Starved Investors Are Flocking to Closed-End Funds

PIMCO Global StocksPlus & Income is an example of how high premiums can make CEFs sensitive to changes in distribution rates.


Jason Kephart: Over the past year, income-starved investors have flooded in to closed-end funds. Closed-end funds typically offer very attractive yields compared to mutual funds thanks to their use of leverage. The average long-term municipal bond closed-end fund, for example, had a distribution rate of 5% at the end of September. The mutual fund average was just 3%. 

The chase for yield has pushed the valuation of some closed-end funds through the roof, though. Since closed-end funds have a fixed number of shares that trade daily on an exchange, it's not unusual to see the share price deviate significantly from the actual value of the fund's underlying assets. At the end of September, 20 closed-end funds were trading at more than a 10% premium. The higher the premium, the more sensitive the closed-end fund could be to changes in distribution rates. 

Jason Kephart does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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