Every week, we’ll profile a high yield investment fund that typically offers an annualized distribution of 6-10% or more. With the S&P 500 yielding less than 2%, many investors find it difficult to achieve the portfolio income necessary to meet their needs and goals. This report is designed to help address those concerns.
I often profile closed-end funds in this space because that’s usually where the best pure yield opportunities lie. The total return track record and risk taken to achieve that yield may not be ideal, but there’s no question that they can provide steady and predictable monthly income in the right situations. The question then becomes how you can build a total portfolio using CEFs. Sure, you can do your research and assemble a lineup of closed-end funds on your own, but sometimes it’s easier and makes more sense to have someone do the research for you.
That’s where the Saba Closed-End Funds ETF (CEFS) comes in as an intriguing option. It’s a fund-of-funds that searches for the best opportunities within the CEF space that offer attractive yields, trade at a discount to net asset value and offers an interest rate hedge. It’s an all-in-one solution that provides diversification and takes the guesswork out of trying to add individual high yield names to your portfolio. It comes at a cost though and may not fit your personal portfolio allocation target, but it’s worth taking a deeper look at.
Fund Background
CEFS is an actively managed ETF that seeks to generate high income by investing in closed-end funds trading at a discount to net asset value, and hedging the portfolio’s exposure to rising interest rates. The investment process includes proprietary screens that dynamically rank closed-end funds across a variety of factors including yield, discount to NAV and quality of underlying securities. CEFS seeks to outperform index-based closed-end fund products by actively trading the portfolio in an attempt to capture the widening and narrowing of discounts to net asset value.
CEFS is a pretty standard active management play - betting that the fund’s managers can outperform the broader market. The factor-based approach, which looks at discounts to NAV, yield and the composition of the underlying funds themselves makes a lot of sense. Over the course of the fund’s 6-year history, that strategy has paid off. It’s earned a 4-star rating from Morningstar and has outperformed its Morningstar in three of the past four years as well as year-to-date 2023. The real disadvantage is the cost. Closed-end funds are generally expensive to begin with and Saba layers a 1% management fee on top of that, which brings the total expense ratio to 2.90%. That’s going to be a tough hurdle to overcome over time.
CEFS is constructed very much as a balanced fund - half of assets going to equity and half of assets going to fixed income.
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