Closed-end funds are still attractive investments for income-focused investors. They offer high income (generally between 6%-10% and on average 8%+), broad diversification in terms of the total number and variety of included assets, and at least market-matching total return in the long-term. But careful selection and research homework here is even more important than in case of the much better analytically covered ETFs.

CEFs share some traits with traditional open-end mutual funds:

● Both have an underlying portfolio of investments with a net asset value

● Both are run by a professional management team

● Both have expense ratios and, typically, fee schedules

● Both may offer distributions of income and capital gains to investors

However, traditional mutual funds issue and redeem shares daily, at the end of business, at the fund's net asset value. CEFs do not issue or redeem shares daily. Instead, CEF shares trade on an exchange intraday, like stocks. The share price for a CEF is set by the market. The share price only rarely, and by sheer coincidence, equals the CEF's net asset value. Also unlike traditional mutual funds, CEFs may issue debt and/or preferred shares to leverage their net assets. That leverage can increase distributions (income) but also increases volatility of the net asset value.

It is important to only invest in funds with a track record of high performance. Also, it is important to buy them at reasonable discounts (discounted from NAV). It is also important to diversify the ad-hoc CEF portfolio in terms of underlying asset types. It is recommended that a CEF portfolio contain at least 10 positions. Income investors must also evaluate the appeal of closed-end funds in terms of their income yield, reliability, and sustainability.

If we did our homework well, and market permits, a portfolio of $500K CEFs can theoretically produce nearly $40,000 per year, as opposed to $7,500 for the S&P 500. A long-term compound portfolio may not grow as quickly as expected for those who rely on deferred annuities. However, it might still be enough to keep up with inflation. This is definitely better than plain vanilla annuities, which have many known drawbacks. An investor can withdraw less than 5-6% to remain in the principal investment. The remainder of the yield can be reinvested in the initial funds, or, alternatively, in a new fund, to maintain reasonable capital growth. A CEF portfolio can deliver 10% or better long-term total returns if selected and managed well.

Regardless of all that, it is important to understand the risks and challenges associated with CEFs. Before an investor makes an investment in CEFs, he/she must consider income limitations and other requirements, as well as goals, and risk tolerance.