Why Now Is the Time for Closed-End Fund Strategies

Persistent, elevated inflation raises the likelihood of higher interest rates for longer. An elevated or rising rate environment creates pockets of opportunity within asset classes such as closed-end funds. Investors would do well to look to these strategies for income as rates hold.

Federal Reserve Chair Jerome Powell indicated that rates would remain elevated for longer at a policy forum in mid-April. “The recent data have clearly not given us greater confidence, and instead indicate that it’s likely to take longer than expected to achieve that confidence,” Powell said, reported CNBC.

The rising rate environment of the last two years generated prolonged market volatility. In such an environment, asset class dislocations became much more commonplace. For closed-end funds, it resulted in wider discounts.

A closed-end fund (CEF) launches with a set number of shares and does not create or redeem shares daily. Instead, they trade at a discount or premium to the value of the securities within the portfolio. CEFs trading at a discount create arbitrage potential for investors to capitalize on a potential narrowing discount.

Invest in Closed-End Funds With CCEF

The Calamos CEF Income & Arbitrage ETF (CCEF) launched in January 2024 and seeks to provide high monthly income as well as capital appreciation. The fund does so by investing in closed-end funds that generate income and trade at significant discounts. At launch, CEFs traded at an average discount of 11% compared to their 7% five-year average, according to Matt Kaufman, head of ETFs at Calamos Investments, in an interview on the NAVigator podcast at CCEF’s launch.

CCEF is actively managed, and Calamos brings over two decades of closed-end fund investing and 45 years of active investing in managing the fund. Calamos identifies and invests in CEFs trading at a steep discount that has potential to return closer to NAV over time. This creates arbitrage that the strategy captures.

Plenty of Investment Variety for CCEF

Higher rates for longer create the potential for further discount opportunities within CEFs. CCEF invests in the full spectrum closed-end funds in terms of asset class exposure, including – but not limited to - CEFs that hold municipal bonds, U.S. and international stocks, covered calls, and high yield securities. This creates strong diversification within the fund itself and allows CCEF to enhance broader portfolio diversification. Active management allows the fund to remain nimble in changing rate environments.

The fund also excludes Calamos-issued closed-end funds, providing unbiased exposure to the space. CCEF is fully transparent and holds 39 securities as of 05/10/2024.

“To have an active manager like Calamos screening that closed-end fund universe makes investing in CEFs significantly easier,” Kaufman explained. “Finding the ones we think have the best potential to close those discounts — that are also paying high monthly income along the way — is something that’s really resonated with a lot of advisors.”

CCEF generated a 30-day SEC yield of 7.16% and a distribution yield of 8.14% as of 03/31/2024. The fund has a management fee of 0.74%.