Are Buying CEFs Now Like Trying To Catch A Falling Chainsaw?

A few weeks ago a fire department colleague asked me about closed end funds (CEF). I used to use a couple back when the choice available in ETFs was more limited. I haven't used a CEF as an across the board holding in ages. My friend read something about them and had questions. I showed him charts of a couple long standing CEFs that have been steadily eroding since the financial crisis. 

For being pretty antiquated in the age of ETFs, Barron's writes about them, or at least mentions them pretty frequently including this week. It's more of mention this week including the Matisse Discounted Bond CEF Fund (MDFIX) which is a fund of closed end funds. This chart compares it to the Invesco CEF Income Composite ETF (PCEF) year to date.

 

They are each down about 20%, in line with the S&P 500. If you have various equity exposures, as opposed to one broad based fund for equity exposure, then chances are some of them are down less and some are down more and that is not a problem. If the stock market is down 20% chances are your equity exposure will probably be down something similar. That's all fair game but people don't really buy closed end income funds for equity beta. 2021 makes the point.

 

It was a great year for stocks, and relative to things you don't want full equity beta from, both MDFIX and PCEF did pretty well I'd say. Still though, equity beta only on the way down? That's not too compelling. 

At some point these sorts of things have fallen enough for some to try to bottom fish them. Is that your trade? It's not my trade, certainly not in size which is not to say I would never buy one again but guessing that they've bottomed in what might be the middle of a market event is not something I am going to do. CEFs have two layers. You need to understand what the fund tracks which is probably learnable but then you need to guess, and it is a guess, about whether the discount to NAV (if you don't know that that means, do some research on how they work) is done expanding, or might narrow or whatever.

Where I think they might have a role is what I mentioned the other day which is a circumstance where you expect to deplete a bucket of money as part of a strategy of delaying Social Security and allowing an IRA or the like to grow. 

CEFs aren't complicated like some of the multi strategy mutual funds we've looked at lately but they are far from plain vanilla.