Following a tumultuous year, the economy appears poised for recovery and investors are increasingly looking for new opportunities in the markets. According to a recent Investopedia investor sentiment survey, 45% of actively invested readers are feeling bullish ab🅰out the year to come and nearly the same perceꦬntage say they’re looking to invest more in 2021 than they did in 2020.

For inv༒estors interested in managing risk and maximizing their returns, closed-end funds (C✨EFs) can offer some potential benefits. Below, we break down what they are and what to consider if you’re interested in tapping into these unique investment vehicles.

The Basics: What Is a Closed-End Fund?

Before we dive int🐭o the specifics of closed-end funds, it’s important to understand the basics. 

So, what exactly are closed-end funds? They’re portfolios o𒆙f assets that are listed on a stock exchange. While CEFs have some notable simila🤪rities to mutual funds and ETFs, they also have some key differences. 

One of the most significant differences is that they raise capital only once through an initial public offering (IPO) a🅘nd issue a fixed number of shares. After those shares are sold, the fund is considered closed and shares are traded like stocks on an exchange.  

Diversification Can Help Protect Against Volatility 

A key benefit of closed-end funds is that they provide a simple way to diversify your portfolio. One of the ways they do this is through broad market exposure. Depending on the type of fund you choose, this could include exposure to a wide range of asset classes or a specific asset class and a variety of underlying securities. Common asset classes include municipal bonds,🐼 taxable fixed income, and equities.

Due to their closed stru📖cture, CEFs don’t need to hold a significant amount of cash to meet redemption requests from shareholders. Portfolio managers also aren’t requiredꦬ to manage daily liquidity with these types of funds. As a result, CEFs can stay more fully invested and they can also invest in assets with less liquidity, such as thinly traded securities. 

In turn, this can make it easier for CEFs to withstand market turbulence and lead to better long-term performance. With volatility likely to be an ongoing trend this year, diversifying with closed-end fundsꦏ can be a helpful way to manage risk and safeguard your portfolio. 

Closed-End Funds Offer the Potential for Higher Returns

Another benefit of closed-end funds is that they provide the possibility of higher returns. This is larꦺ🐽gely due to their use of leverage—using borrowed capital to make additional investments that broaden a fund’s exposure. 

While it’s important to understand that leverage can increase risk by amplifying a fund’s performance (whether positive or negative), effective management strategies can mitigate this risk and lead to better results. Over time, leverage has been shown to have a net positive effect when☂ it comes to fund performance. 

This is especially beneficial for investors looking to generate income, making closed-end funds a valuable addition to a well-balanced portfolio. Since CEFs typically pay out distributions on a monthly or quarterly basis, they present inv💟estors with a great opportunity to reinvest the dividends and boost their future returns.

For those who prefer not to reinvest the dividends, these distributions can serv෴e as a supplemental source of income. Given t👍he current low interest rate environment, this can be an attractive option for those looking for a steady and consistent income stream. 

Certain Funds May Also Have Tax Advantages

Closed-end funds offer another benefit in the form of tax efficiency. This is because they are professionally managed and are often optimize🅺d for long-term gains. Many also include tax-advantaged or even tax-exempt asset classes such as municipal securities. 

While it’s important𝔍 to note that tax efficiency varies from one fund to another, CEFs may lower your overall tax burden when included in a well-balanced portfolio. This can be especially beneficial if you’ve had a notable change in your tax situation over the past year—including a job change, potential loss of income related to the pandemic, or a move to a different state. 

If you’re interested in adding closed-end funds to your portfolio, it’s important to select those that can provide you with the right mix of diversification and income. The best way to do this is by selecting a closed-end fund provider wh𓄧o can offer you a wide range of funds designed to meet your specific needs. 

As the largest closed-end fund provider in the country (based on AUM), Nuveen has . These include tax-advantaged funds such as the (NMZ) and growth-focused funds such as the (JRI). With more than 120 ye♊ars of experience managing assets designed for income, Nuveen also offers focused expertise in the form of active management and pursues lasting value for investors.

A diversified portfolio is often the best way to protect againsꦏt market swings and generate additional income. As the uncertainty of the past year continues to affect economies and global markets, closed-end funds can be an important addition to your portfolio and help you achieve the diversification you need. 

It is important to consider the objectives, risks, charges and expenses of any fund before investing. Investing in closed-end funds involves risk; principal loss is possible. There is no guarantee a fund’s investment objective will be achieved. Closed-end fund shares may frequently trade at a discount or premium to their net asset value (NAV). Closed-end fund historical distribution sources include net investment income, realized gains, and return of capital. All investments carry a certain degree of risk and there is no assurance that an investment will provide positive performance over any period of time. 

Leverage increases return volatility and magnifies a fund’s potential return whether that return is positive or negative. There is no guarantee a fund’s leveraging strategy will be successful.

Nuveen Securities, LLC., member FINRA and SIPC.

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