{"id":53259,"date":"2023-08-26T09:42:42","date_gmt":"2023-08-26T13:42:42","guid":{"rendered":"https:\/\/ifintechworld.com\/news\/5-best-cefs-to-buy-this-month-august-2023\/"},"modified":"2023-08-26T09:42:47","modified_gmt":"2023-08-26T13:42:47","slug":"5-best-cefs-to-buy-this-month-august-2023","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=53259","title":{"rendered":"5 Best CEFs To Buy This Month (August 2023)"},"content":{"rendered":"
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In this monthly article, we try to identify five closed-end funds (“CEFs”) that have a solid historical performance, pay high-enough distributions, and offer reasonable valuations at the current time. We also present a more diversified list of the top 10 funds.<\/p>\n

Author’s Note: This article is part of our monthly series that tries to discover the five best buys in the CEF arena at that point in time. Certain parts of the introduction, definitions, and sections describing selection criteria\/process may have some commonality and repetitiveness with our other articles in this series. This is unavoidable as well as intentional to keep the entire series consistent and easy to follow for new readers. Regular readers who follow the series from month to month could skip the general introduction and sections describing the selection process.<\/em><\/p>\n

Why Invest in CEFs?<\/span><\/strong><\/h2>\n

For income-focused investors, closed-end funds remain an attractive investment class that offers high income (generally in the range of 6%-10%, often 8% plus), broad diversification (in terms of the number of holdings and variety of asset classes), and market-matching total returns in the long term, if selected carefully and acquired at reasonable price points. A $500K CEF portfolio can generate nearly $40,000 yearly compared to a paltry $8,000 from the S&P 500. Now, if you were a retiree and needed to use all of the income (generated by the CEF portfolio), the portfolio probably would grow marginally or not grow much. Even then, it beats investment vehicles like annuities without some of their downsides. However, if you can withdraw 5% or under while re-investing the rest of the yield into the original fund (or new funds), the total return could exceed 10% over a long period.<\/em><\/p>\n

That said, the goal here is to earn a high income or boost the income yield of an otherwise diversified portfolio. If your current spending needs are comfortably met with less than 3% income yields, you may be better served with a well-diversified traditional DGI (dividend growth investing) portfolio instead. We also write a monthly series to identify “5 Safe and Cheap DGI” stocks. You can read our most recent article <\/em>here.<\/em><\/p>\n

Nevertheless, if you are an investor in CEFs, it’s important to be aware of the risks and challenges of investing in CEFs. We list various risk factors and how to mitigate them towards the end of this article. Like most other investments, these investments are not suitable for everyone, so please carefully consider your goals, income needs, and risk tolerance.<\/em><\/p>\n

How to Structure a High-Quality CEF Portfolio?<\/strong><\/h2>\n

As such, CEFs provide higher yields than other types of investments or typical dividend stock. It is very important that we do not chase high yields or distributions; rather, we should compare a host of metrics to judge if a fund would be a good investment. We should invest in funds that have a proven history of good performance. Besides, we should try to buy them when offered at reasonable discounts (discount to NAV). We should generally avoid funds that are trading at premiums. In addition, it is of utmost importance that we diversify our CEF portfolio in terms of underlying asset classes. This is why we recommend having at least ten positions in the CEF portfolio. Besides, income investors need to make a judgment that distributions are sustainable.<\/em><\/p>\n

Market uncertainties will always remain with us. It’s best to keep the focus on our long-term goals and strategies that have proven to work in good times and bad. If you are a new investor and\/or starting a brand new CEF portfolio, we recommend starting small and building the positions over time. For most investors, we believe a 20%-25% allocation to closed-end and high-income funds should be enough.<\/em><\/p>\n

Our Five Best CEFs To Consider Every Month<\/strong><\/h2>\n

This series of articles attempts to separate the wheat from the chaff by applying a broad-based screening process to 500 CEF funds followed by an eight-criteria weighting system. Ultimately, we’re presented with about 30-40 of the most attractive funds to select the best five. However, please note that we do not consider funds with fewer than five years of history. We use our multi-step filtering process to select just five CEFs from around 500 available funds. We also include a list of the top 10 funds for readers looking for a wider selection and diversification.<\/em><\/p>\n

This is our regular series on CEFs, where we highlight five CEFs that are relatively cheap, offer “excess” discounts to their NAVs, pay reasonably high distributions, and have a solid track record.<\/em><\/p>\n

The selected five CEFs this month, as a group, are offering an average distribution rate of more than 9% (as of 08\/18\/2023). Besides excellent distributions, these five funds have a proven past record over the short and the long term and collectively returned 10.89%, 8.55%, and 9.27% in the last three, five, and ten years. The leverage for the group, on average, is reasonable, at 17%. The current average discount (to NAV) is also attractive, roughly at -6.5%. Since this is a monthly series, some selections may overlap from month to month.<\/p>\n

Please note that these are not recommendations to buy but should be considered as a starting point for further research.<\/em><\/p>\n

Goals For the Selection Process<\/strong><\/h2>\n

Our goals are simple and are aligned with most conservative income investors, including retirees who wish to dabble in CEFs. We want to shortlist five closed-end funds that are relatively cheap, offer good discounts to their NAVs, pay relatively high distributions, and have a solid and substantial past track record in maintaining and growing their NAVs. Please note that we are not necessarily going for the cheapest funds (in terms of discounts or highest yields) but also require our funds to stand out qualitatively. We adopt a systematic approach to filter down the 500-plus funds into a small subset.<\/em><\/p>\n

Here’s a summary of our primary goals:<\/em><\/p>\n