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CEF role in a portfolio

Hello CEF holders,

Entering retirement soon, up to this point primary equity investor with some bonds.  Primarily Mutual Funds and ETFs.

What investment characteristic is unique to CEF's? It appears that many retirees hold them as a source of income.  Most interested to understand how CEF's fill a place in portfolios and how they compare to Bonds. Preferreds and dividend (aristocrat) paying equities. 

Regards and thanks in advance, Stay well.

Blue Devil - BK

 

 

 

 

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Re: CEF role in a portfolio

 

here's one place to start for you to better answer your question .... the first of a series of educational articles on CEFs in which the author is approaching this matter much as you are:

https://seekingalpha.com/article/4287662-learn-cefs-getting-started

 

 

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Re: CEF role in a portfolio


@Bluedevil156 wrote:

Hello CEF holders,

Entering retirement soon, up to this point primary equity investor with some bonds.  Primarily Mutual Funds and ETFs.

What investment characteristic is unique to CEF's? It appears that many retirees hold them as a source of income.  Most interested to understand how CEF's fill a place in portfolios and how they compare to Bonds. Preferreds and dividend (aristocrat) paying equities. 

Regards and thanks in advance, Stay well.

Blue Devil - BK


Don't think in terms of the 'wrapper' but in terms of the asset class and sector.  You have the 5 major asset classes, stocks, bonds, preferred stocks, precious metals, and cash.  You can construct a portfolio using OEFs, CEFs, ETFs, ETNs, options, and individual securities, or any permutation/combination that implements whatever 'asset allocation' you come up with.

The different 'wrappers' have different risk/return characteristics.  Figure out and FULLY understand the characteristics of each before using them.  You are already familiar with OEFs and ETFs.  Great start.  Vanguard, and probably most investment houses, have articles describing how OEFs and ETFs are similar, as well as how they differ.

I assume, from its title, that the reference article describes how CEFs work.  Focus on the mechanics, which are that CEFs are similar to ETFs but more complicated.  ETNs are a whore of another color.  Individual assets are way more risky than an OEF, CEF, ETF, or ETN that holds them.  Individual stock options can be way more risky than holding the individual stocks that they are written against, or way safer!

But DON'T think just in terms of 'general' concepts, such as:

  • CEFs often offer high, stable yields. That may make them attractive to income-seeking investors.
  • But: Where do those yields come from? What are the risks?

There's nothing more profound in those statements than the following:

  • Stocks for growth, bonds for income
  • Longer term and lower quality bonds are higher yield at higher risk
  • Leverage and margin produce higher returns at higher risk
  • Higher yields are attractive to income-seeking investors, who are usually retirees

By the way, I have been retired for 17 years now.  My 'baseline' portfolio, up until a month ago, consisted of 1 CEF and 3 ETNs.  Now I am holding at 2 ETNs and cash.  My two ETNs are based upon the dividend aristrocrats and preferred stock.  The CEF was bonds, mostly mortgage backed securities.  My 4th. ETN was based upon Mortgage Real Estate Investment Trusts (MREITs).  It is 2X leveraged and very high income.

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