5 Best CEFs To Buy This Month (August 2021)



  • For income investors, closed-end funds remain an attractive investment class that covers a variety of asset classes and promise high distributions and reasonable total returns.
  • Closed-end funds are generally characterized by higher volatility and deeper drawdowns than the broad market. For these reasons, they are not suited for everyone.
  • In this monthly series, we highlight five CEFs that have solid track records, pay high distributions, and are offering "excess" discounts. We try to separate the wheat from the chaff using our filtering process to select just five CEFs every month from around 500 closed-end funds.
  • Looking for a portfolio of ideas like this one? Members of High Income DIY Portfolios get exclusive access to our model portfolio. Learn More »
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The market has maintained its steady but slow rise this past month. There appears to be a little pause recently, but the direction clearly seems to be trending up. As we write, the Senate has passed the $1 trillion bipartisan Infrastructure bill. Though it will be good for many sectors, high inflation worries continue to be on everyone's mind. The big debate about whether the inflation that we see currently is transitory or of a more persistent nature still continues. More and more investors have started to discount the "transitory" nature of inflation. Nonetheless, inflation or no inflation, we think interest rates are going to stay low or fairly low for a considerable time to come.

In the first half of the year, CEFs (closed-end funds) and other high-income securities have performed very well. It's unlikely that we're going to see the same level of gains in the second half of the year. But in a sense, that's welcome news for the folks who are in the accumulation phase. With the rise in CEF's valuations, the yields have come down significantly. It's very hard right now to initiate a new diversified CEF portfolio with average yields above 7%. We would rather prefer the yields to be in the range of 8%. Obviously, there's nothing to complain about if you put together a portfolio last year or as we did about six years ago. Nonetheless, if you were to start a new portfolio today, our recommendation would be to start small and build the positions over time.

All that said, the future always is hazy, so it's usually prudent to ignore the short-term gyrations of the market and focus on the long term. It's best to keep the focus on our long-term goals and strategies that have proven to work in good times and bad. We recommend a 15%-25% allocation to closed-end and high-income funds. In that spirit, we keep looking for good investment opportunities and try to separate the wheat from the chaff on a regular basis.

Why Invest in CEFs?

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 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 a year, compared to a paltry under $7,500 from the S&P 500. Now, if you were a retiree and needed to use all of that income, the portfolio would not grow much, but it may still grow enough to beat the rate of inflation. That certainly beats investment vehicles like annuities. With CEFs, you have to think in terms of income rather than capital growth.

Ideally, if you have a large enough pool of retirement funds, there's generally no need to put more than 20% into CEFs, but these are decisions that can only be made on a personal level based on individual situations.

However, it's important to be aware of the risks and challenges that come with investing in CEFs. We list various risk factors at the end of this article. They are not suitable for everyone, so please consider your goals, income needs, and risk tolerance carefully before you invest in CEFs.

CEFs had taken a serious beating in the early stages of the pandemic last year, and their recovery had been much weaker than the broader market. But that has changed this year in 2021. As a result, we no longer have the kind of discounts that were being offered until the end of last year. In fact, just the opposite, most of the CEFs are probably overvalued today.

With that in view, one should buy selectively and in small and multiple lots. No one can predict the future direction of the market with any degree of certainty. So, we continue to be on the lookout for good investment candidates that have a solid track record, offer good yields, and are offering great discounts.

Five Best CEFs to Consider Every Month

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. In the end, we're presented with about 30-40 of the most attractive funds in order to select the best five. However, please note that we do not consider funds that have a history of fewer than five years.

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. We also write a monthly series to identify "5 Safe and Cheap DGI" stocks. You can read our most recent article here.

We use our multi-step filtering process to select just five CEFs from around 500 available funds.

The selected five CEFs this month, as a group, are offering an average distribution rate of nearly 7.00% (as of 08/06/2021) and an average discount of -0.59%. Besides, these five funds have an excellent past record and collectively returned 17.96%, 15.90%, and 12.51% in the last three, five, and 10 years. Since this is a monthly series, there may be some selections that could overlap from month to month. As we have seen the trend over the last few months, the average yield is a bit on the lower side. Sure, this is mostly because of the incredible run-up in CEFs valuations during the last six months. However, our larger group of 10 CEFs provides a slightly higher yield.

Please note that these are not recommendations to buy but should be considered as a starting point for further research.

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 the section describing selection criteria/process may have some commonality and repetitiveness with our other articles in the series. This is unavoidable as well as intentional to keep the entire series consistent and easy to follow for the new readers. Regular readers who follow the series from month to month could skip the general introduction and sections describing the selection process.

Goals for the Selection Process

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, offering good discounts to their NAVs, paying 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 we also require our funds to stand out qualitatively. We adopt a systematic approach to filter down the 500-plus funds into a small subset.

Here's a summary of our primary goals:

  • High income/distributions.
  • Reasonable long-term performance in terms of total return on NAV: We also try to measure if there has been an excess NAV return over and above the distribution rate.
  • Cheaper valuation at the time of buy, determined by the absolute discount to NAV and the "excess" discount offered compared to their history.
  • Coverage ratio: We try to measure to what extent the income generated by the fund covers the distribution. Not all CEFs fully cover the distribution, especially the equity, and specialty funds, as they depend on the capital gains to cover their distributions. We adjust this weight according to the type and nature of the fund.

We believe that a well-diversified CEF portfolio should at least consist of 10 CEFs or more, preferably from different asset classes. It's also advisable to build the portfolio over a period rather than invest in one lump sum. If you were to invest in one CEF every month in a year, you would have a well-diversified CEF portfolio. What we provide here every month is a list of five probable candidates for further research. We think a CEF portfolio can be an important component in the overall portfolio strategy. One should preferably have a DGI portfolio as the foundation, and the CEF portfolio could be used to boost the income level to the desired level. How much should one allocate to CEFs? Each investor needs to answer this question himself/herself based on the personal situation and factors like the size of the portfolio, income needs, risk appetite, or risk tolerance.

Selection Process

We have more than 500 CEF funds to choose from, which come from different asset classes like equity, preferred stocks, mortgage bonds, government and corporate bonds, energy MLPs, utilities, infrastructure, and municipal income. Just like in other life situations, even though the broader choice always is good, it does make it more difficult to make a final selection. The first thing we want to do is to shorten this list of 500 CEFs to a more manageable subset of around 75-100 funds. We can apply some criteria to shorten our list, but the criteria need to be broad and loose enough at this stage to keep all the potentially good candidates. Also, the criteria that we build should revolve around our original goals. We also demand at least a five-year history for the funds that we consider. However, we do take into account the 10-year history, if available.

Criteria to Shortlist:


Brings down the number of funds to...

Reason for the Criteria

Baseline expense < 2.5% and Avg. Daily Volume > 10,000

Approx. 435 Funds

We do not want funds that charge excessive fees. Also, we want funds that have fair liquidity.

Market-capitalization > 100 Million

Approx. 400 Funds

We do not want funds that are too small.

Track record/ History longer than five years (inception date 2016 or earlier)

Approx. 375 Funds

We want funds that have a reasonably long track record.

Discount/Premium < +6%

Approx. 350 Funds

We do not want to pay too high a premium; in fact, we want bigger discounts.

Distribution (dividend) Rate > 5%

Approx. 250-275 Funds

The current distribution (income) to be reasonably high.

5-Year Annualized Return on NAV > 0% AND

3-Year Annualized Return on NAV >0%

Approx. 200 Funds

We want funds that have a reasonably good past track record in maintaining their NAVs.

After we applied the above criteria this month, we were left with 195 funds on our list, in fact, a bit lower than our target of 200 funds. But it's still too long a list to present here or a meaningfully select five funds.

Note: All tables in this article have been created by the author (unless explicitly specified). Most of the data in this article are sourced from Cefconnect.com, Cefa.com, and Morningstar.com.

Narrowing Down to 50-60 Funds

To bring down the number of funds to a more manageable count, we will shortlist 10 funds based on each of the following criteria. After that, we will apply certain qualitative criteria to each fund and rank them to select the top five.

At this stage, we also eliminate certain funds that have had substantial negative NAV returns for both three-year and five-year periods.

Seven broad criteria:

  • Excess discount/premium (explained below).
  • Distribution rate.
  • Return on NAV, last three years (medium-term).
  • Return on NAV, last five years (long term).
  • Coverage ratio.
  • Excess return over distributions.
  • The total weight (calculated up to this point).

Excess Discount/Premium:

We certainly like funds that are offering large discounts (not premiums) to their NAVs. But sometimes we may consider paying near zero or a small premium if the fund is great otherwise. So, what's important is to see the "excess discount/premium" and may not be the absolute value. We want to see the discount (or premium) on a relative basis to their record, say 52-week average.

Subtracting the 52-week average discount/premium from the current discount/premium will give us the excess discount/premium. For example, if the fund has the current discount of -5%, but the 52-week average was +1.5% (premium), the excess discount/premium would be -6.5%.

Excess Discount/Premium = Current Discount/Premium (Minus) 52-Wk Avg. Discount/ Premium

So, what's the difference between the 12-month Z-score and this measurement of Excess Discount/Premium? The two measurements are quite similar, maybe with a subtle difference. The 12-month Z-score would indicate how expensive (or cheap) the CEF is in comparison to the 12 months. Z-score also takes into account the standard deviation of the discount/premium. Our measurement (excess discount/premium) compares the current valuation with the last 12-month average.

We sort our list (of 195 funds) on the "excess discount/premium" in descending order. For this criterion, the lower the value, the better it is. So, we select the top 10 funds (most negative values) from this sorted list.

(All data as of 08/06/2021)

High Current Distribution Rate:

After all, most investors invest in CEF funds for their juicy distributions. We sort our list (of 195 funds) on the current distribution rate (descending order, highest at the top) and select the top 10 (actually 12) funds from this sorted list.

Medium-Term Return on NAV (last three years):

We then sort our list (of 195 funds) on a three-year return on NAV (in descending order, highest at the top) and select the top 10 funds.

Five-Year Annualized Return on NAV:

We then sort our list (of 195 funds) on the five-year return on NAV (in descending order, highest at the top) and select the top 10 funds.

Coverage Ratio (Distributions vs. Earnings):

We then sort our list (of 195 funds) on the coverage ratio and select the top 10 funds. The coverage ratio is derived by dividing the earnings per share by the distribution amount for a specific period. Please note that in some cases, the coverage ratio may not be very accurate since the "earnings per share" maybe three to six months old. But in most cases, it's fairly accurate.

Excess Return Over Distribution:

This is the "excess return" provided by the fund over the distribution rate. It's calculated by subtracting the distribution rate from the three-year NAV return.

Total Weight (Quality Score) calculated up to this point:

Note: The Total Weight calculation is not fully completed at this point since we have not taken into account the 10-year NAV return. Also, we would adjust the weight for the coverage ratio at a later stage. However, we select the top 15 names on this basis (instead of 10 for other criteria).

Now we have 75 funds in total from the above selections. We will see if there are any duplicates. In our current list of 75 funds, there were 28 duplicates, meaning there are funds that appeared more than once. The following names appear twice (or more):

Appeared two times: AGD, AOD, CHI, CHN, CHY, EOS, GF, GLQ, IHD (9 duplicates)

Appeared three times: ACV, CCD, CSQ (6 duplicates)

Appeared four times: STK, TWN (6 duplicates)

Appeared five times: ASG, BST (8 duplicates)

So, once we remove 29 duplicate rows, we are left with 46 (75-29) funds. We also remove the MLP fund "TYG" due to a negative overall quality score. So, we are left with 45 funds.

Note: It may be worthwhile to mention here that just because a fund has appeared multiple times does not necessarily make it an attractive candidate. Sometimes, a fund may appear multiple times simply for wrong reasons, like a high current discount, high excess discount, or a very high distribution rate that may not be sustainable. But during the second stage of filtering, it may not score well on the overall quality score due to other factors like poor track record. That said, if a fund has appeared four times or more, it may be worth a second look.

Narrowing Down to Just 10-12 Funds

In our list of funds, we already may have some of the best probable candidates. However, so far, they have been selected based on one single criterion that each of them may be good at. That's not nearly enough. So, we will apply a combination of criteria by applying weights to eight factors to calculate the total quality score and filter out the best ones.

We will apply weights to each of the eight criteria:

  • Baseline expense (Max weight 5)
  • Current distribution rate (Max weight 7.5)
  • Excess discount/premium (Max weight 5)
  • 3-YR NAV return (Max weight 5)
  • 5-YR NAV return (Max weight 5)
  • 10-YR NAV return (Max weight 5, if less than ten years history, an average of three-year and five-year)
  • Excess NAV return over distribution rate (Max weight 5)
  • Adjusted Coverage Ratio (Max weight 5): This weight is adjusted based on the type of fund to provide fair treatment to certain types like equity and sector funds. We assign some bonus points to certain types of funds, which by their make-up depend on capital gains to fund their distributions, to bring them at par with fixed-income funds. These fund types include Equity/ Sector equity (three bonus points), real estate (three points), covered call (two points), and MLP funds (variable). However, please note that this is just one of nine criteria that are being used to calculate the total quality score.

Once we have calculated the weights, we combine them to calculate "Total Combined Weight," also called the "Quality Score." The sorted list (spreadsheet) of 45 funds on the "combined total weight" is attached here.

The top 30 funds (out of 45) based on the quality score also are listed below. Please note that the quality score only indicates the likeliness of a good candidate, but investors should do further research and due diligence on individual names. Also, an otherwise good fund may not make it to the top because it may have become expensive and may not offer value at the current pricing. Further, you will see in the following section that we should diversify in many asset classes. For example, there may be more than one fund in a specific asset class in the top 30, but we should just choose one or two from a specific asset class.

(ASG), (AGD), (AOD), (ETG), (GF), (RVT), (BST), (TWN), (CHN), (NFJ), (RMT), (SCD), (NIE), (FUND), (GAB), (IGR), (OTCPK:DNIF), (USA), (EOS), (BUI), (CHY), (STK), (FLC), (CHI), (IFN), (CCD), (BBN), (ACV), (RFI), (MCI)

Sector-Wise (Asset-Class) Diversification:

In order to structure a CEF portfolio, it's highly recommended to diversify in funds that invest in different types of asset classes. In our list of 45, if we were to look at first on the basis of asset type (sector) and then based on the total quality score/weight, below is the list of top funds. However, if we had two similar funds from the same fund family, we have ignored the second one to avoid duplicity. Please note that some asset classes may not make it to the top due to the fact that these ratings are dynamic and time-sensitive and change from month to month.

If you were to select 10 picks, we could simply pick the top one from each of the above categories. That said, due diligence on each name is still recommended. Please note that some of these funds have cut their distributions recently, and for some folks, that may be a good enough reason not to consider them. Also, in our final selection of five funds, we tend to give priority to funds that pay regular distributions on a monthly or quarterly basis. For example, some top funds, like TWN and CHN (both emerging market funds), pay very irregular dividends, so we are going to ignore them from our final selections.

Here's the list of top 10 (top candidates from 10 different asset classes):

Final Selection: Our List of Final Top 5

Now, if we had only five slots for investment and need to select just five funds, we will need to make some subjective selections. However, we should be careful to select from different sectors (or asset classes). Since this step is mostly subjective, the choice will differ from person to person. Here are the selections for this month, based on our perspective:

Some information about the selections:

  • ASG and ETG are our US equity and Global Equity funds, respectively. ASG is actually trading at an excess discount right now, so it may be a good buy. Both ASG and ETG have excellent past records in terms of both growth and dividend distributions.
  • Under the "Convertibles" category, CHY and CHI from the Calamos family have topped this month. We have selected CHY in our top five. CHI/ CHY maintained their distributions last year and have recently increased them.
  • EOS is our covered-call pick for the month. Besides a near 7% distribution, it has an excellent short, medium, and long-term record.
  • BBN is the municipal (taxable) fund. Every month, we try to keep one fund from the conservative asset class. BBN fits into this category, though the yield is a bit low at 5.31%.
  • None of our top five funds reduced their distributions in the last 12 months. In fact, all of them have increased the distributions in the last 12 months to varying degrees.

Table: The Final 5 Funds:

CEF-Specific Investment Risks

It goes without saying that CEFs, in general, have some additional risks. This section is specifically relevant for investors who are new to CEF investing, but in general, all CEF investors should be aware of it.

  • Leverage and high fees:

They generally use some amount of leverage, which adds to the risk. The leverage can be hugely beneficial in good times but can be detrimental during tough times. The leverage also causes higher fees because of the interest expense in addition to the baseline expense. In the tables above, we have used the baseline expense only. If a fund is using significant leverage, we want to make sure that the leverage is used effectively by the management team - the best way to know this is to look at the long-term returns on the NAV. NAV is the "net asset value" of the fund after counting all expenses and after paying the distributions. So, if a fund is paying high distributions and maintaining or growing its NAV over time, it should bode well for its investors.

  • Volatility:

Due to leverage, the market prices of CEFs can be more volatile as they can go from premium pricing to discount pricing (and vice versa) in a relatively short period. Especially during corrections, the market prices can drop much faster than the NAV (the underlying assets). Investors who do not have an appetite for higher volatility should generally stay away from CEFs or at least avoid the leveraged CEFs.

  • Premium over NAVs:

CEFs have market prices that are different from their NAVs (net asset values). They can trade either at discounts or at premiums to their NAVs. Generally, we should stay away from paying any significant premiums over the NAV prices unless there are some very compelling reasons.

  • Asset-specific risk:

Another risk factor may come from asset concentration risk. Many funds may hold similar underlying assets. However, this is easy to mitigate by diversifying into different types of CEFs ranging from equity, equity covered calls, preferred stocks, mortgage bonds, government and corporate bonds, energy MLPs, utilities, and municipal income.

Concluding Thoughts

We use our screening process to highlight five likely best closed-end funds for investment each month. As always, our filtering process demands that our selections have an excellent long-term record, maintain decent earnings to cover the distributions (in certain categories), offer an average of 7%-8% distributions, and are cheaper on a relative basis, and offer a reasonable discount. Also, we ensure that the selected five funds are from a diverse group in terms of the types of assets. Please note that these selections are based on our rating system and are dynamic in nature. So they can change from month to month (or even week to week). At the same time, some of the funds can repeat from month to month if they remain attractive over an extended period.

The selected five CEFs this month, as a group, are offering an average distribution rate of nearly 7.00% (as of 08/06/2021) and an average discount of -0.59%. Besides, these five funds have an excellent past record and collectively returned 17.96%, 15.90%, and 12.51% in the last three, five, and 10 years. Since this is a monthly series, there may be some selections that could overlap from month to month.

When it comes to CEF investing, we always recommend that it's best to be a bit conservative and build our positions by adding in small and multiple lots to take advantage of dollar-cost averaging. We believe that the above group of CEFs makes a great watch list for further research.

High Income DIY Portfolios: The primary goal of our "High Income DIY Portfolios" Marketplace service is high income with low risk and preservation of capital. It provides DIY investors with vital information and portfolio/asset allocation strategies to help create stable, long-term passive income with sustainable yields. We believe it's appropriate for income-seeking investors including retirees or near-retirees. We provide ten portfolios: 3 buy-and-hold and 7 Rotational portfolios. This includes two High-Income portfolios, a DGI portfolio, a conservative strategy for 401K accounts, and a few High-Growth portfolios. For more details or a two-week free trial, please click here.

This article was written by

High-income, lower-risk portfolios suited for income-seeking investors.

I am an individual investor, an SA Author/Contributor, and manage the “High Income DIY (HIDIY)” SA-Marketplace service. However, I am not a Financial Advisor. I have been investing for the last 25 years and consider myself an experienced investor. I share my experiences on SA by way of writing three or four articles a month as well as my portfolio strategies. You could also visit my website “FinanciallyFreeInvestor.com” for additional information.

I focus on investing in dividend-growing stocks with a long-term horizon. In addition to a DGI portfolio, I manage and invest in a few high-income portfolios as well as some Risk-adjusted Rotation Strategies. I believe "Passive Income" is what makes you 'Financially Free.' My personal goal is to generate at least 60-65% of my retirement income from dividends and the rest from other sources like real estate etc.

My current "long-term" long positions (DGI-dividend-paying) include ABT, ABBV, CI, JNJ, PFE, NVS, NVO, AZN, UNH, CL, CLX, UL, NSRGY, PG, KHC, TSN, ADM, MO, PM, BUD, KO, PEP, EXC, D, DEA, DEO, ENB, MCD, BAC, PRU, UPS, WMT, WBA, CVS, LOW, AAPL, IBM, CSCO, MSFT, INTC, T, VZ, VOD, CVX, XOM, VLO, ABB, ITW, MMM, LMT, LYB, RIO, O, NNN, WPC, TLT.

My High-Income CEF/BDC/REIT positions include:


In addition to my long-term positions, I use several "Rotational" risk-adjusted portfolios, where positions are traded/rotated on a monthly basis. Besides, at times, I use "Options" to generate income. I am also invested in a small growth-oriented Fin/Tech portfolio (NFLX, PYPL, GOOGL, AAPL, JPM, AMGN, BMY, MSFT, TSLA, MA, V, FB, AMZN, BABA, SQ, ARKK). From time to time, I may also own other stocks for trading purposes, which I do not consider long-term (currently own AVB, MAA, BX, BXMT, CPT, MPW, DAL, DWX, FAGIX, SBUX, RWX, ALC). I may use some experimental portfolios or mimic some portfolios (10-Bagger and Deep Value) from my HIDIY Marketplace service, which are not part of my long-term holdings. Thank you for reading.


Disclosure: I/we have a beneficial long position in the shares of ABT, ABBV, JNJ, PFE, NVS, NVO, UNH, CL, CLX, GIS, UL, NSRGY, PG, KHC, ADM, MO, PM, BUD, KO, PEP, D, DEA, DEO, ENB, MCD, BAC, PRU, UPS, WMT, WBA, CVS, LOW, AAPL, IBM, CSCO, MSFT, INTC, T, VZ, VOD, CVX, XOM, VLO, ABB, ITW, MMM, LMT, LYB, ARCC, AWF, CHI, DNP, EVT, FFC, GOF, HCP, HQH, HTA, IIF, JPC, JPS, JRI, KYN, MAIN, NBB, NLY, NNN, O, OHI, PCI, PDI, PFF, RFI, RNP, RQI, STAG, STK, USA, TLT either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Disclaimer: The information presented in this article is for informational purposes only and in no way should be construed as financial advice or recommendation to buy or sell any stock. The author is not a financial advisor. Please always do further research and do your own due diligence before making any investments. Every effort has been made to present the data/information accurately; however, the author does not claim 100% accuracy. The stock portfolios presented here are model portfolios for demonstration purposes. For the complete list of our LONG positions, please see our profile on Seeking Alpha.

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