With low rates the norm in the American market, the push to
find current income opportunities in other areas continues. While
most investors are now familiar with junk bonds, MLPs, and REITs
due to this situation, there are still some overlooked corners of
the landscape that can provide income.
One in particular is that of the closed-end fund market. These
closed-end funds may sound like mutual funds but they are
actually very different from their more famous counterparts.
First, closed-end funds are listed and traded on an exchange
and they generally represent an investment
company that has raised a fixed amount of
capital
via an IPO. The firm then utilizes this capital to go
out and purchase a portfolio of securities on the open market in
order to generate solid returns for investors (read
Do You Need The IPO ETF In Your Portfolio?
).
While this might sound very similar to a lot of securities out
on the market, investors should note that closed-end funds do not
generally issue new shares while they are also generally illiquid
and some even charge a yearly management fee. Due to these
factors, closed-end funds often trade at a significant discount
to NAV, although there are always exceptions.
However, many times these funds utilize active management
techniques which can generate solid returns while the income
levels in many of these closed-end products are downright
impressive with many exceeding 5% if not double that level. So,
if investors can get by the illiquidity of the space truly solid
yield levels can be achieved with relative ease (
Guide to 10 Great ETFs Yielding 7% or More
).
Yet for investors who are still uncertain about the idea and
are squeamish about choosing from hundreds of different
closed-end funds, there are actually some ETF options available
that target the space. That's right, there are actually two
exchange-traded funds that hold closed-end funds as their assets,
giving investors access to the closed-end world with the ease of
trading that comes with every Exchange-Traded Product.
The two products in this space are the
Claymore CEF GS Connect ETN (
GCE
)
and the
PowerShares CEF Income Composite Portfolio (
PCEF
)
. While they may appear similar at first glance, there are
actually some key differences between the two, some of which we
have highlighted below:
PowerShares CEF Income Composite Portfolio
(PCEF)
The most popular Closed-end fund focused ETF on the market is
PCEF, a product that tracks the S-Network Composite Closed-End
Fund Index. It is structured as a fund of funds that invests in
taxable investment grade fixed-income securities, taxable junk
bond securities, and others that utilize an equity option writing
strategy.
With this approach, the fund is spread out across 125
securities with no more than 5.7% going in any one component. In
terms of the categories listed above, investment grade bonds
account for roughly 43% of exposure, followed by option income
(37.4%) and high yield with the remainder (see
Top Three High Yield Junk Bond ETFs
)
Investors should note that the fund of fund structure does
result in a relatively high cost as acquired fund fees account
for 1.06% of the total 1.56% annual cost of investing in PCEF.
Still, the product has decent volume approaching the six digit
level on a daily basis suggesting that bid ask spreads should be
relatively tight.
Furthermore, from a performance look, PCEF has outperformed
GCE by a tad so far in 2012, adding about 8.55% this year.
Meanwhile on the yield front, this PowerShares fund also beats
out its competitor posting a 7.9% payout in 12 month terms and
7.6% in SEC 30 Day terms.
Claymore CEF GS Connect ETN (GCE)
This product tracks the Claymore CEF Index which is a
rules-based benchmark designed to track the performance of a
weighted basket of closed end funds. These securities are
selected based on liquidity, income distribution and market
valuation, just to name a few.
In total, the note is exposed to 75 CEFs in total with an
average market cap just below $1 billion for each. Holdings are
quite spread out, with only two CEFs occupying more than 5% of
the portfolio and all of the top ten accounting for at least 2.4%
of assets (read
Three Small Cap ETFs with Impressive Yields
).
Investors should also note that GCE is structured as an ETN so
it doesn't actually hold the securities but instead acts as an
unsubordinated debt security that promises to pay out a return
equal to the underlying benchmark. While this does expose the
holders to the credit risk of Goldman Sachs, it also eliminates
tracking error and keeps expenses relatively low at 95 basis
points a year.
From a performance perspective, the product has added 7.8% YTD
while the yield squeaks by the 7.1% mark in 12 month terms.
However, it should be noted that volume is extremely light so
investors could have to pay more in bid ask spreads in order to
get in and out of GCE.
|
Data Point
|
PCEF
|
GCE
|
|
Expense Ratio
|
1.56%
|
0.95%
|
|
Yield (12-Month)
|
7.9%
|
7.1%
|
|
YTD Performance
|
8.55%
|
7.77%
|
|
# of Holdings
|
126
|
75
|
|
Volume
|
93,000
|
4,600
|
|
Structure?
|
ETF
|
ETN
|
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CLYMR-CEF GS CN (GCE): ETF Research Reports
PWRSH-CEF ICP (PCEF): ETF Research Reports
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