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Posts Tagged ‘CEF’

Comparing Closed-end Funds that Replicates S&P 500′s

March 4th, 2010

We mentioned in our previous posting that we allocate a small amount of our portfolio into closed-end funds. We also recommend you to do research before buying closed-end funds because they tend to be more expensive than ETFs. Besides, some closed-end funds use leverage which will add risk.

We would like to compare a couple of closed-end funds that track S&P 500, i.e.:

All those three funds are basically buying stocks in S&P 500. They tried to outperform S&P 500 by writing options (covered call). That’s why; if you look at their fact sheets, they pay very high dividend. BlackRock’s Enhanced Capital and Income Fund, for example, pays 12.64% dividend. Yes, it’s double-digit dividend.

Now, let’s compare the performance of those funds to SPY, which is the biggest ETF that replicates S&P 500. As you can see, none of those funds can beat SPY in the long run. From year 2007 until today, here are the return of those funds:

CII: –25.05%
ETB: –22.37%
JCE: –39.67%
SPY: –21.44%

Of course, if you choose the right funds, the overall return including dividend might be higher than SPY.

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Tags: CEF CII closed-end dividend ETB funds JCE s&p 500

Buying Closed-end Funds?

March 3rd, 2010

Some experts have been recommending a couple of closed-end funds recently because of their high-yield dividend. See also recommendations from two speakers at Money Show Orlando 2010 here and here.

For those who are new to closed-end funds, here is the description from Investopedia.com.

A closed-end fund is a publicly traded investment company that raises a fixed amount of capital through an initial public offering (IPO). The fund is then structured, listed and traded like a stock on a stock exchange.

Closed-end funds are usually designed to offer more income to investors, either by using leverage or covered call. Yes, you see the word leverage there; so it means more risks.

There are a couple of closed-funds company out there, such as BlackRock (also the issuer of the very popular iShares ETFs), Eaton Vance, Nuveen, ING, Alpine and many more.

Personally, we allocate a very small amount of money in closed-end funds. Why?

The management fee of closed-end funds tends to be higher than ETFs. Worse, the fee information is sometimes not easy to find.
Many closed-end funds are traded at very large premium or discount (more than 10% is quite normal). It is going to be tricky when we are about to buy or sell.
Some closed-end funds are using too much leverage, which can be very risky.

If you want to invest in closed-end funds, do your own research or talk to your financial advisor. There are some good closed-end funds that may provide additional income in this kind of market. CEFConnect.com has a very good closed-end funds screener.