A guide to investing in closed-end funds

Closed-end funds (“CEFs”) are actively managed mutual funds that trade on an exchange like a stock. CEFs can play an important role in a diversified portfolio providing the potential for income and
capital appreciation.

Essential CEF data
CEF press releases

What are the advantages of closed-end funds?

Trade like
a stock

CEFs are typically listed on a major exchange such as the New York Stock Exchange which provides the benefit of intra-day liquidity for investors.

Access unique investment opportunities

The “closed” structure allows portfolio managers to access a broader opportunity set including less liquid investments that offer higher income and return potential.

Enhanced income potential through the use of leverage

CEFs can borrow money to increase exposure to investments with the goal of enhancing income and capital appreciation potential.

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Why BlackRock?

BlackRock has over 25 year of experience managing closed-end funds and, as of June 30, 2017, advised a registered closed-end family of 73 exchange-listed active funds with approximately $46 billion in assets.

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Types of closed-end funds

Tax-exempt municipal bond funds

Primarily invest in tax-exempt municipal bonds and may utilize leverage to enhance income potential. BlackRock offerings include national and state specific funds.

Taxable fixed
income funds

Invest in one or more fixed income sectors and may utilize leverage to enhance income potential. BlackRock offerings include investment grade, high yield, bank loan and multi-sector funds.

Equity funds

Invest in stocks and may utilize an option overwrite strategy to enhance income potential. BlackRock offerings include domestic, international and global and sector specific funds.

Essential CEF data

More about closed-end funds

What are some of the myths surrounding Closed-end Funds?

BlackRock believes that CEFs can offer investors a strong income stream. However, there may be some misunderstandings in the market around them.

Myth #1: A CEF is a standard mutual fund that is closed off to new investors.
Truth: Mutual funds and CEFs do share some commonalities, but there are important differences. Unlike a mutual fund, for example, a CEF trades on a stock exchange in the secondary market and typically does not redeem or issue shares on a daily basis, and a CEF is able to issue debt and preferred shares.

Myth #2: A CEF is an exchange-traded fund (ETF).
Truth: CEFs share traits with ETFs, but there are notable differences. CEFs are actively managed by a team of professionals, whereas ETFs are passively managed and track an index, like the NASDAQ or Dow Jones Industrial Average. In addition, unlike an ETF, a CEF is able to issue debt or preferred shares.

Myth #3: High return of capital percentage is destructive for CEF returns.
Truth: Return of capital is a complex tax concept. CEFs can use return of capital to lower investor tax obligations but it's just one consideration of suitability for that CEF. We advise care and due diligence around all variables when assessing the suitability of a particular CEF investment.

Myth #4: Share price performance is the best indicator of a CEF's return.
Truth: BlackRock believes that price performance overlooks a large portion of a CEF's total return, but it is often the main metric offered on financial statements. Also, we believe that only by looking at a CEF's total return do investors get a clear picture. Total return takes into account any change in the CEF's share price, as well as any investor distributions received.

What are the risks associated with Closed-end Funds?

Like any investment product, closed-end funds offer opportunity but also come with a number of risks, some of which are listed below.

  • Market risk. Just like open-ended funds, closed-end funds are subject to market movements and volatility. The value of a CEF can decrease due to movements in the overall financial markets.
  • Interest rate risk. Changes in interest rate levels can directly impact income generated by a CEF. Funds that have a portfolio with a significant allocation to fixed income assets, like bonds, may be more exposed to this type of risk as interest rates change.
  • Other risks. CEFs are exposed to much of the same risk as other exchange traded products, including liquidity risk on the secondary market, credit risk, concentration risk and discount risk. If the CEF includes foreign market investments, it will be exposed to the typical foreign market risks, including currency, political and economic risk.

For a more complete description of other risks relevant to a particular Closed-end Fund, please see such Closed-end Fund’s filings with the SEC.

What are some important factors to consider when investing in Closed-end Funds?

  1. BlackRock believes that it is important for an investor to understand a Closed-end Fund’s overall investment objective. This information is available in the Closed-end Fund’s prospectus and in shareholder reports. Understanding the investment objective will help investors determine whether the particular Closed-end Fund suits their investment goals and level of risk tolerance.
  2. BlackRock believes that in order to get a more complete picture of a CEF's historical performance, it is important to consider the CEF’s total return. The total return calculation looks both at price return as well as any distributions, such as realized capital gains and income. We also believe that other important areas to assess may include asset composition, risk, duration, leveraging, managed distributions policy and covered call writing.

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