Robert Powell, editor of TheStreet's Retirement Daily, recently interviewed Jeffrey Levine, CEO and founder of Blueprint Wealth Alliance and director of adviser education at Kitces.com, and they discussed the reasons to hold closed-end funds (CEFs) in your portfolio.
1. Look for Discounts and Premiums
Among the advantages, CEFs - unlike open-end mutual funds - trade at a discount or premium to net asset value. So for instance, a CEF that is valued at $10, may trade on the exchange at $9. "So, there is an inherent value there that may be available," says Levine.
Oh the flip-side, be aware of buying at a premium, or over the asking price, as you may not get your money back when you sell.
2. There is an Opportunity for Monthly Income
Investors seeking income might also consider CEFs as opposed to things like unit investment trusts (UITs) or master limited partnerships (MLPs), because CEFs offer a monthly income stream and could be more tax-advantageous.
3. CEFs Are Not as Liquid as a Mutual Fund
Of course, CEFs are not without risks.
CEFs have a limited number of shares that trade in the market, whereas there are essentially an unlimited amount of mutual fund shares. So there are greater liquidity concerns when you want to exit the fund, notes Levine. Basically, you need to find a buyer that is willing to take your shares when you want to sell, much like a stock. You do not have the same concern with mutual fund shares.
4. Understand the CEF's Portfolio
Much like you should know the holding in your mutual funds to avoid portfolio duplication, you should do the same with your CEFs.
So, if you hold 10 individual bonds in your portfolio, make sure the CEF you are buying does not own those funds as well, says Levine.
5. Consider Holding in Taxable Accounts
When adding CEFs to a portfolio, Levine also said it's important to understand where you are holding the asset.
Basically, should it be in your a taxable account, your tax-deferred account, lie your IRA, or a tax-free such as a Roth IRA?
But with interest rates so low these days, "in many instances it's actually better to hold those income-bearing investments in your taxable account and own regular stocks in your tax-deferred account," said Levine.
Big note: This approach is contrary to conventional wisdom.
But sure to talk to your financial advisory to make sure you consider all aspects of your portfolio.
You can with certainty so-called "closed-end" mutual funds - an often overlooked investment class. Click here to register for a free online video in which TheStreet's retirement expert Robert Powell and an all-star panel tell you all you need to know. The webinar is sponsored by Nuveen.