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Income-seeking investors have the opportunity to grab double-digit yields in closed-end funds, according to Bank of America Securities. The firm believes some funds are a buy, despite the rally they’ve seen this year. Closed-end funds (CEFs) trade publicly on exchanges, but are different from exchange-traded funds and open-ended mutual funds in that they only offer a fixed number of shares. Due to that, the share price may trade at a discount or a premium to their net asset value. “While valuations are not that attractive, yields on cash are expected to fall in coming quarters as the Fed cuts interest rates, and CEF yields today are high,” strategist Jared Woodard said in a late August note. “Loans, multi-sector, and convertibles funds on average offer yields of 11% or more, [more than one standard deviation] above their long-term averages.” Households in the United States hold more than $19 trillion in cash and cash equivalents, he noted. “They may soon feel the need to allocate elsewhere as BofA Global Research expect[s] inflation to remain sticky in 2025 even as interest rates fall in 2026,” Woodard wrote. “After taxes and inflation, for many investors the returns on cash will probably be negative.” The Federal Reserve is expected to resume cutting rates later this month. The market is currently pricing in about a 92% chance that the central bank will lower its benchmark lending rates at its September meeting, according to the CME FedWatch Tool . Picking your spots Every closed-end fund sector, except municipal bonds, has generated positive returns so far this year, Woodard said. Tax-advantaged equity, real estate, multi-sector, covered call and preferred funds are the best performing sectors. Only master limited partnerships (MLPs) trade at discounts meaningfully below their long-term average, he noted. Investors should keep in mind that many closed-end funds have fees that can exceed 1%, which can hurt long-term returns. Many also use leverage, which can help boost returns or add to losses on the downside, as well as add volatility. Here are some of the names that Bank of America Securities rates a buy, broken into municipal bond funds and non-muni funds. Municipal bonds are free of federal tax and, if the holder lives in the state in which the bond is issued, exempt from state tax as well. Woodard favors muni bonds that have solid discounts and elevated yields. Most of his buy-rated names are leveraged funds. BlackRock MuniAssets , BlackRock Municipal Income and Invesco Municipal Income Opportunities Trust are among his top picks — and they trade at what he calls attractive discounts. “MUA has a higher proportion of holdings below investment grade but all three trade at least one standard deviation below their average valuations,” he noted. BlackRock MuniAssets is trading at a discount of 1% and has a distribution rate of 6.21%, according to Nuveen’s CEF Connect , a database and tracking tool for closed-end funds. BlackRock Municipal Income trades at a 7.72% discount and has a 6.61% distribution rate, while Invesco Municipal Income Opportunities Trust trades at a 1.88% discount and offers a 6.09% distribution rate. Cohen & Steers Quality Income Realty Fund is one of Woodard’s buys in among closed-end real estate funds. It trades at a 3.24% discount and has a distribution rate of 7.66%. In the multi-sector category, Pimco High Income Fund is among his top picks. The fund sells for a 6% premium and has an 11.61% distribution rate. “PHK has the most attractive valuation, trading [one standard deviation] below average, with strong risk-adjusted returns,” Woodard wrote. Among the MLP names Woodard likes is Tortoise Energy Infrastructure Corp . While MLPs are trading at discounts below their long-term average, those discounts are narrowing, he said. TYG is the highest yielding name in the category and has an attractive portfolio exposure, he noted. Meanwhile, tax advantaged funds are up about 15%, on average, so far this year and discounts are continuing to compress, Woodward said. John Hancock Tax-Advantaged Dividend Income Fund is one of his buy-rated names in the category thanks to its strong dividend stability and a favorable tax profile. It currently trades at about a 5% discount and has a 7.71% distribution rate.
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