How do you guys feel about closed-end funds? (pay, rate, income)

[HappyinCali]

How do you guys feel about closed-end funds? I have done a lot of research on them, and it seems the two biggest issues are liquidity and leverage. Liquidity, there is not really much I can do about. Leverage, I can deal with by choosing smart managers with a successful track record. I was very worried about the market and I sold almost all of my equities and rotated into closed-end funds. In addition, a lot of these funds trade below their NAV, so you automatically have a margin of safety built in (how realizable that Margin of safety is, is a different issue).

These funds have dividends of 10%. These dividends get taxed at ordinary income, so let’s assume you are down to 7.5% after tax. Then you have management fees, which are 1.5%, so you are down to 6%. In this environment, I think 6% return on your money is very good, especially since my mortgage rate is low 3%. What do you guys think? Why are these not more popular? Also, the dividends are paid monthly, so you make 0.9% or so on your money every month with a special dividend at the end of the year.

Does anyone have more experience with them? are they too good to be true?

[Lowexpectations]

Anything that has 10% yield should be something you question

[Bettereducation]

I donor know closed funds that much. But the set up that the money is always there for fund managers just makes one less reason for managers to work hard.

[Newporttom]

Closed end funds invest in tons of different things. And have tons of different yields. Some do yield 10%. Some yield essentially nothing. Some invest in nothing but gold and silver, some invest in municipals. So a lot of your blanket statements are false.

A closed end fund does not sell shares to the public. After it does the IPO and someone buys the shares, if that shareholder wants to sell, he sells to another person thru a stock exchange. That means that the fund does not have to sell their assets to meet withdrawal requests.

The funds price will deviate from the value of the underlying assets. Sometimes at a premium. Sometimes at a discount. At lot of closed-end investors like to buy at a discount.

Closed end funds tend to have higher management fees and sometimes employ leverage.

So here's the deal. You would invest in a closed end fund if you found one you like, that invested in something you liked, that had fees you were comfortable with. Unless you found the same thing in a ETF or Mutual Fund and you preferred them.

I invest in some closed end funds. Specifically ones that invest in preferred stocks. They pay monthly. They have about 30% leverage. They yield about 8% AFTER fees. I did not invest in a ETF that does the same thing. It pays less (about 6%) and has no leverage. I invested in the Closed End version because I think Preferred Stocks are fairly safe therefore I am comfortable with leverage on them. That leverage produces the extra 2% of return.