6 Outperforming Core Asset Closed-End Fund Asset Allocation Portfolios

by: MyPlanIQ

We are introducing asset allocation portfolios using closed-end funds (CEFs). Closed-end funds are traditionally viewed as a niche of investment vehicles because of their low trading volumes. CEFs are like exchanged traded funds (ETFs) that can be traded continuously on exchanges but since there is no automatic arbitrage mechanism provided by market makers and providers, CEFs can be priced above or below their Net Asset Values (NAVs), so called discount or premium pricing. Because of low trading volume and the peculiar discount/premium pricing, the market for CEFs has been limited and recently eclisped by that of ETFs.

However, CEFs provide possible exposure to many asset classes (or markets), especially in the fixed income class. As a result, they are still very favorable to retirement investors or income investors. Here we look at one of the Simpler Is Better (SIB) core portfolios that cover six key asset classes: US Equity, International Equity, Emerging Market Equity, REITs, Commodities and Fixed Income. The following are the six CEFs that represent the asset classes in Six Core Asset CEFs plan:

Asset Class Ticker Name ETF Equivalent
LARGE VALUE (NYSE:GDV) Gabelli Dividend & Income Vanguard Total Stock Market (NYSEARCA:VTI)
Foreign Large Blend (NYSE:BGY) BlackRock International Growth & Income Vanguard Total Intl Market (NYSEARCA:VEU)
DIVERSIFIED EMERGING MKTS (NYSE:EMF) Templeton Emerging Markets Vanguard Emerging Market (NYSEARCA:VWO)
REAL ESTATE (NYSE:RQI) Cohen & Steers Qual Inc Realty Vanguard REITs (NYSEARCA:VNQ)
Commodities Precious Metals (NYSEMKT:CEF) Central Fund of Canada PowerShares DB Commodity (NYSE:DBC)
WORLD BOND (NYSE:GIM) Templeton Global Income Vanguard Total Bond (NASDAQ:BND)

For each asset class, we select a CEF that is representative and have high trading volume. In the commodity class, we have to resort to Central Fund of Canada (CEF; note this is the symbol not to be confused with CEF abbreviation), that is really a precious metal (gold and silver) holder. Templeton Global Income is not exactly comparable with BND, as GIM is more a global bond fund, not just a U.S. bond fund.

Six Core Asset CEFs has the highest rating among many ETF brokerage plans we provide. The following is a snapshot of some plans:

Name TAA 5 Yr Return Annualized Plan Rating
Six Core Asset CEFs 14% 77%
Vanguard ETFs 13% 69%
Six Core Asset ETFs 15% 63%
Retirement Income ETFs 11% 58%
David Swensen Six ETF Asset Individual Investor Plan 12% 57%
Five Core Asset Index ETF Funds 13% 56%
Permanent Portfolio Fund PRPFX ETF Plan 9% 54%
Schwab ETF Select List 13% 50%
TD Ameritrade Commission Free ETFs 15% 47%
Alexander Green`s Gone Fishin ETF Portfolio 11% 45%
Schwab Commission Efficient ETFs Including iShares 10% 45%

The following chart and table compares the portfolios with their ETF counterparts in the Six Core Asset ETFs plan:

[Click to enlarge]

Performance table (as of June 20)

Portfolio Name 1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe
Six Core Asset CEFs Tactical Asset Allocation Moderate 19% 124% 16% 94% 14% 81%
Six Core Asset CEFs Strategic Asset Allocation Moderate 23% 188% 8% 34% 8% 39%
Six Core Asset ETF Benchmark Tactical Asset Allocation Moderate 11% 111% 7% 57% 14% 97%
Six Core Asset ETF Benchmark Strategic Asset Allocation Moderate 15% 146% 3% 14% 8% 38%

The CEF portfolios outperform the ETF ones with higher volatilities. Notice one can examine these CEF portfolios in a longer time frame since CEFs have been in existence for much longer time.

In conclusion, income investors can explore to use closed-end funds in asset allocation portfolios. We will have more articles on this going forward.

Disclosure: I am long GIM.