PCEF Invesco CEF Income Composite ETF

With low rates the norm in the American market, the push to find current income opportunities in other areas continues. While most investors are now familiar with junk bonds, MLPs, and REITs due to this situation, there are still some overlooked corners of the landscape that can provide income.

One in particular is that of the closed-end fund market. These closed-end funds may sound like mutual funds but they are actually very different from their more famous counterparts.

First, closed-end funds are listed and traded on an exchange and they generally represent an investment company that has raised a fixed amount of capital via an IPO.   The firm then utilizes this capital to go out and purchase a portfolio of securities on the open market in order to generate solid returns for investors (read Do You Need The IPO ETF In Your Portfolio?).

While this might sound very similar to a lot of securities out on the market, investors should note that closed-end funds do not generally issue new shares while they are also generally illiquid and some even charge a yearly management fee. Due to these factors, closed-end funds often trade at a significant discount to NAV, although there are always exceptions.

However, many times these funds utilize active management techniques which can generate solid returns while the income levels in many of these closed-end products are downright impressive with many exceeding 5% if not double that level. So, if investors can get by the illiquidity of the space truly solid yield levels can be achieved with relative ease (Guide to 10 Great ETFs Yielding 7% or More).

Yet for investors who are still uncertain about the idea and are squeamish about choosing from hundreds of different closed-end funds, there are actually some ETF options available that target the space. That’s right, there are actually two exchange-traded funds that hold closed-end funds as their assets, giving investors access to the closed-end world with the ease of trading that comes with every Exchange-Traded Product.

The two products in this space are the Claymore CEF GS Connect ETN (GCE) and the PowerShares CEF Income Composite Portfolio (PCEF). While they may appear similar at first glance, there are actually some key differences between the two, some of which we have highlighted below:

PowerShares CEF Income Composite Portfolio (PCEF)

The most popular Closed-end fund focused ETF on the market is PCEF, a product that tracks the S-Network Composite Closed-End Fund Index. It is structured as a fund of funds that invests in taxable investment grade fixed-income securities, taxable junk bond securities, and others that utilize an equity option writing strategy.

With this approach, the fund is spread out across 125 securities with no more than 5.7% going in any one component. In terms of the categories listed above, investment grade bonds account for roughly 43% of exposure, followed by option income (37.4%) and high yield with the remainder (see Top Three High Yield Junk Bond ETFs)

Investors should note that the fund of fund structure does result in a relatively high cost as acquired fund fees account for 1.06% of the total 1.56% annual cost of investing in PCEF. Still, the product has decent volume approaching the six digit level on a daily basis suggesting that bid ask spreads should be relatively tight.

Furthermore, from a performance look, PCEF has outperformed GCE by a tad so far in 2012, adding about 8.55% this year. Meanwhile on the yield front, this PowerShares fund also beats out its competitor posting a 7.9% payout in 12 month terms and 7.6% in SEC 30 Day terms.

Claymore CEF GS Connect ETN (GCE)

This product tracks the Claymore CEF Index which is a rules-based benchmark designed to track the performance of a weighted basket of closed end funds. These securities are selected based on liquidity, income distribution and market valuation, just to name a few.

In total, the note is exposed to 75 CEFs in total with an average market cap just below $1 billion for each. Holdings are quite spread out, with only two CEFs occupying more than 5% of the portfolio and all of the top ten accounting for at least 2.4% of assets (read Three Small Cap ETFs with Impressive Yields).

Investors should also note that GCE is structured as an ETN so it doesn’t actually hold the securities but instead acts as an unsubordinated debt security that promises to pay out a return equal to the underlying benchmark. While this does expose the holders to the credit risk of Goldman Sachs, it also eliminates tracking error and keeps expenses relatively low at 95 basis points a year.

From a performance perspective, the product has added 7.8% YTD while the yield squeaks by the 7.1% mark in 12 month terms. However, it should be noted that volume is extremely light so investors could have to pay more in bid ask spreads in order to get in and out of GCE.

 

Data Point	PCEF	GCE
Expense Ratio	1.56%	0.95%
Yield (12-Month)	7.9%	7.1%
YTD Performance	8.55%	7.77%
# of Holdings	126	75
Volume	93,000	4,600
Structure?	ETF	ETN

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CLYMR-CEF GS CN (GCE): ETF Research Reports
 
PWRSH-CEF ICP (PCEF): ETF Research Reports
 
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