Guide to Investing in Closed-End Funds
Types of Closed-End Funds
Diversified equity CEFs invest in common and preferred stocks of domestic and international companies, and may emphasize current income, capital appreciation, or some combination of income and capital appreciation. These CEFs may build portfolios that consist of stocks issued by a broad range of companies, diversified across industries, geographies and economic sectors, or they can focus on specific investment styles such as large cap, small cap, growth or value.
These CEFs focus on high-quality instruments, such as Treasuries, government agencies and investment-grade corporate bonds, all of which generate interest income that is taxable by the federal government. Others may add lower grade high yield bonds into the portfolio, which provide attractive rates of return at somewhat a higher level of risk.
Municipal bond CEFs seek to pay income exempt from federal income taxes (and, in some cases, also exempt from state or local income taxes). These CEFs invest in bonds issued by state and local governments and agencies. Professional managers monitor bond ratings and credit quality, and usually seek to broadly diversify the portfolio and avoid adverse events or defaults that might impact a given sector, region or issuer. Many municipal bond closed-end funds make use of leverage to enhance their return potential.
These CEFs focus on stocks of a particular industry such as banking, media, natural resources or health care, or on specialized securities such as preferred stocks or convertible securities. They can offer a way for investors to participate in the fortunes of an economic sector, industry group or specialized security, while reducing risk through diversification.
CEFs offer counterparts to the mutual funds that build globally diversified portfolios of stocks or fixed income instruments. CEFs that diversify portfolio assets among U.S. and foreign securities are called "global," while those that focus on non-U.S. investments only are considered "international." Some CEFs specialize in emerging market securities, which can be highly volatile and somewhat illiquid under adverse market conditions. Since CEFs are not forced to sell assets from their portfolios to meet redemptions, they may offer special advantages over open-end funds in such markets, as well as access to markets that are difficult for open-end funds to invest in given their liquidity considerations.
There are single-country funds specializing in stocks traded in countries such as Korea, India, Mexico, Spain and Germany. The closed-end fund structure gives the portfolio manager the freedom to devise a long-term strategy and hold positions through periodic declines, which may impact stocks in these markets. The goal of most single-country funds is to produce superior capital appreciation over holding periods of several years.
The floating rate CEF is a timely alternative for investors seeking the potential for high current income. These CEFs have underlying securities with floating rates, which are structured to reset as interest rates move up or down so that investors can take advantage of these movements. These funds may offer investors a "hedge" against rising interest rates.
This guide is not to be construed as a solicitation or an offer to buy or sell securities. The views contained herein are those of BlackRock and are based on information obtained by BlackRock from sources that are believed to be reliable. This material should not be considered tax, investment, legal or other professional advice. The information herein is not necessarily all-inclusive and is not guaranteed as to accuracy. Reliance upon information in this guide is at the sole discretion of the reader. Past performance does not guarantee future results. No assurance can be given that a fund will achieve its investment objective. The investment return and principal value of an investment will fluctuate, so that an investor's shares, when redeemed or sold, may be worth more or less than their original cost.