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Closed End Funds
Old 04-25-2018, 10:13 AM   #1
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Closed End Funds

I’d never really thought of or read about close end funds. I was reading the following article and wanted to see what some thoughts were from this group:

https://www.nasdaq.com/article/forge...-risk-cm951241

The article talks about ten options but the one that caught my attention was #9 - ADX. Apparently the fund is committed to a distribution of 6%. I didn’t know products/funds like this existed. The article indicates that ADX is very stable, been around since 1929, carries little debt and has an expense ratio just over 1/2 percent, which is less than many of my Fido funds.

Is something like this a good option if income is the goal? Similar to bonds with a higher yield.

There were also some other funds/ideas that seemed interesting. Any comments on those would be welcome. Basically, I like the idea of having someone working for me to generate income if I can get it at a good price (expense ratio). The closest thing to this that Fido offered was a bond fund that they felt could distribute 5% annually. But that didn’t make much sense to me since they said the underlying return was around 3% so they weren’t planning on going with riskier debt to cover the distribution.
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Old 04-25-2018, 10:41 AM   #2
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I don't own CEFs. The knock on them is always about liquidity.
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Old 04-25-2018, 11:31 AM   #3
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I bought some ADX many years ago and have been reinvesting the dividends and capital gains distributions ever since. It's been very stable and pays out a large distribution right around Christmas time every year. This holding is a very low percentage of my total investments.
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Old 04-25-2018, 11:36 AM   #4
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Quote:
Originally Posted by Jerry1 View Post
I’d never really thought of or read about close end funds. I was reading the following article and wanted to see what some thoughts were from this group:

https://www.nasdaq.com/article/forge...-risk-cm951241

The article talks about ten options but the one that caught my attention was #9 - ADX. Apparently the fund is committed to a distribution of 6%. I didn’t know products/funds like this existed. The article indicates that ADX is very stable, been around since 1929, carries little debt and has an expense ratio just over 1/2 percent, which is less than many of my Fido funds.

Is something like this a good option if income is the goal? Similar to bonds with a higher yield.

There were also some other funds/ideas that seemed interesting. Any comments on those would be welcome. Basically, I like the idea of having someone working for me to generate income if I can get it at a good price (expense ratio). The closest thing to this that Fido offered was a bond fund that they felt could distribute 5% annually. But that didn’t make much sense to me since they said the underlying return was around 3% so they weren’t planning on going with riskier debt to cover the distribution.
I have bought and held these over many years. During a deep market draw-down like 2008-2009, we find some very attractive discounts. I buy them then, and sell later and usually too soon. I don't hold any now, as I am stlll in a liquidity building mode. I do not buy into the fixed allocation mantra, and likely never will because imo it does not allow for known regularities of human nature.

Ha
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Old 04-25-2018, 01:18 PM   #5
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FWIW, Nobel prize winner and founder of behavioral economics Richard Thaler cites the CEF discounts and premiums as poster children for irrational human behavior. Not sure what to conclude from that, though.

i have stayed away from them because they seem to add unnecessary complexity without adding any offsetting value.
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Old 04-25-2018, 01:41 PM   #6
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Meh.

What does "committed" to 6% distribution mean? It looks like they just own stocks, pass thru the dividends, and what, sell off enough stock to pay at least 6%?

Although the fund has been around since 1929, current management team has only been there since 2013.

The current discount to NAV is about what it always is.

If stocks decline from here, you may get 6% distribution, but you won't have your original investment.

Why not just buy S&P or like, sell off enough to get you to 6% a year, and pay yourself (sell a little more) an additional 0.5% for being the manager?
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Old 04-25-2018, 09:25 PM   #7
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+1 It seems to underperform VTSAX for most periods even with dividends reinvested and got hammered the same during the great recession just like VTSAX did.... so I don't see the attraction.

VTSAX Vanguard Total Stock Market Index Fund Admiral Shares Fund VTSAX chart
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Old 04-25-2018, 09:47 PM   #8
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Quote:
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+1 It seems to underperform VTSAX for most periods even with dividends reinvested and got hammered the same during the great recession just like VTSAX did.... so I don't see the attraction.

VTSAX Vanguard Total Stock Market Index Fund Admiral Shares Fund VTSAX chart
Isn’t that chart incomparable because the ADX is distributing something (6%) each year? Seems like the base value of the shares is less than the growth of VTSAX, but VTSAX is not distributing. Isn’t VTSAX assuming dividends are reinvested? Note, I’m questioning, not challenging. I’m trying to understand. The thought of a stable distribution appeals to me as an alternative to an annuity.
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Old 04-27-2018, 02:20 AM   #9
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I own CEFs along with everything else (funds, stocks, etfs, etns, etc).

CEFs have some very useful qualities which make them worth owning despite the higher ER. Your typical CEF will have an ER around 2%, half of that to pay for the leverage.

The benefits are: (1) a safe and cost effective way to use leverage, (2) a way to access obscure/illiquid investments, and (3) easy money/withdrawal management.

Most CEFs invest in fixed income assets (about 2/3 of them). Those that invest in equities tend to focus on utilities, mlps, and reits.

Now is a good time to buy CEFs as the discounts have widened due to (IMHO) irrational fears of inflation.

For someone new to investing in CEFs I would suggest starting with an ETF of CEFs like VanEck Vectors CEF Municipal Income ETF. Ticker is XMPT. Its an ETF made up of 70 municipal bond CEFs, and it tries to rebalance itself so that you invest the most in whichever ones have the biggest discount at the time.

https://www.vaneck.com/etf/income/xmpt/overview/

Once you get comfortable enough to invest in individual CEFs, I'd recommend buying John Hancock Tax-Advantaged Dividend Income CEF (ticker HTD), provided it has a descent discount. Its a CEF that is 50/50 utility stocks and preferred stocks. All of the dividends are qualified, and they pay a fixed amount monthly. I like them because they do a very good job at keeping a positive UNII, while growing the dividend and NAV over time. The current yield is 7.55%, but on a leverage adjusted basis it is only 5.18%, which they can maintain easily given the assets they are invested in.

Comparing HTD to Wellessley Income and the S&P 500. The 10-year total return on Wellessley Income is 6.87%, the 10-year return (on NAV) for HTD is 10.57%, finally the 10-year total return on the Vanguard S&P 500 index (VFINX) is 8.76%. The 10-year trailing Sharpe ratio on HTD is .69, for Wellessley it is 1.04, and for VFINX it is .65.

HTD

P.S. My CEF investments are in a taxable account. So I limit myself to tax advantaged options.
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