INSIGHTS
By
John Tabb,
Chief Operating Officer
Sep 10, 2025
Which investment vehicle best serves income-focused portfolios—closed-end funds, ETFs, or mutual funds? In this article, we explore how these structures differ in yield, liquidity, and risk—and why advisors are giving CEFs a second look.
Same Goal, Different Tools
Every financial advisor is tasked with the same challenge: helping clients generate reliable income. But the vehicles used to reach that goal can vary widely. ETFs, REITs, annuities — and, most commonly, open-end mutual funds — each has a role.
One structure, however, is often overlooked in the conversation: Closed-End Funds (CEFs). Though they’ve been around for over a century, CEFs remain underutilized, even as demand for income strategies has never been greater.
So how do CEFs stack up against the more familiar ETFs and mutual funds when the goal is consistent, client-aligned income? Let’s take a closer look.
Structure and Liquidity
Open-End Mutual Funds:
Issue and redeem shares daily at net asset value (NAV).
Easy for investors, but this forces managers to maintain liquidity buffers.
In periods of heavy redemptions, managers may need to sell assets at unfavorable prices.
ETFs:
Also open-ended, but trade on exchanges throughout the day.
Market makers help keep ETF prices close to NAV.
While liquid and flexible, ETFs generally avoid leverage and stick to highly liquid securities.
CEFs:
Fixed pool of capital raised at IPO. No daily redemptions.
Shares trade between investors on an exchange, often at discounts or premiums to NAV.
Managers can remain fully invested in their strategy without worrying about investor flows.
Why it matters for income: CEFs’ fixed structure allows managers to focus on generating yield, rather than managing daily liquidity demands.
Income Distribution
Mutual Funds:
Distributions vary, often quarterly or semiannual.
Not designed with steady client cash flow as the primary goal.
ETFs:
Distributions are tied to the index or strategy.
Many equity ETFs pay dividends quarterly; bond ETFs typically pay monthly but may fluctuate.
CEFs:
Built with income delivery in mind.
Many pay monthly distributions, aligning directly with client spending needs.
This consistency helps advisors manage withdrawal sequencing and improves client confidence.
Yield Potential
Mutual Funds & ETFs:
Core bond ETFs and many mutual funds typically yield in the 3–4% range.
Equity-focused funds rely on dividend-paying stocks, often producing similar yields.
CEFs:
Many CEFs distribute 6–8% or more, depending on strategy and market conditions.
Why higher?
They can use modest leverage to enhance yield.
They can hold less liquid, higher-yielding securities that open-end funds avoid.
Why it matters for income: For clients frustrated with low yields, CEFs can help close the gap between what portfolios deliver and what clients need.
Tactical Opportunities: Discounts and Premiums
Mutual Funds & ETFs:
Always priced at NAV (or very close in the case of ETFs).
No opportunity to buy “at a discount.”
CEFs:
Shares can trade below or above NAV.
Buying at a discount means paying less than the underlying assets are worth.
Discounts may narrow as performance improves or distributions increase — providing potential for capital appreciation in addition to income.
Why it matters for income: Advisors can tactically use discounts to boost long-term portfolio outcomes, a feature unique to CEFs.
Risks to Consider
No structure is risk-free. Advisors need to weigh the trade-offs.
Mutual Funds: Subject to redemption risk, which can force managers to sell at the wrong time.
ETFs: Generally low-cost and efficient, but often limited to highly liquid securities — which can cap yield potential.
CEFs: Offer attractive yields and cash flow, but come with risks:
Leverage can magnify losses in down markets.
Discounts can widen, creating short-term paper losses.
Distributions may be cut if not sustainable.
Why it matters for income: Advisors who use CEFs must monitor leverage, manager quality, and distribution history to ensure sustainability.
The Bottom Line: Which Structure Wins for Income?
Mutual Funds: Familiar, liquid, and diversified — but rarely designed with steady income as the central focus.
ETFs: Flexible and cost-efficient — but often yield-constrained and less suited for generating consistent cash flow.
CEFs: Purpose-built for income, offering higher yields, monthly distributions, and tactical discount opportunities — but requiring careful management of risks.
For income-focused portfolios, CEFs stand out. They may not replace ETFs or mutual funds entirely, but they can add meaningful yield and cash flow when used thoughtfully.
Have Your Cake and Eat It Too
Advisors often feel like they face a trade-off: choose the liquidity and familiarity of a mutual fund, or pursue the higher yields and income features of Closed-End Funds.
The truth is, you don’t have to choose. The Modern Capital Tactical Income Fund is an open-ended mutual fund built on a foundation of Closed-End Funds, complemented by other income-oriented investments when appropriate. It combines the daily liquidity advisors need with the structural advantages of CEFs.
In other words, it lets you have your cake and eat it too.
Why This Matters for Advisors Today
The modern income landscape has shifted. Advisors are under pressure to deliver:
Higher yields to meet client expectations.
Consistent monthly cash flow to align with spending needs.
Resilient portfolios that can weather volatility.
CEFs, while often overlooked, are uniquely positioned to meet these challenges — and with Modern Capital’s Tactical Income Fund, advisors can access them without the complexity of managing dozens of CEFs directly.
Next Step: Learn More
Want to see the full picture of how CEFs compare to ETFs and mutual funds — including risk management strategies and practical portfolio applications?
Download our free guide:
Closed-End Funds: Why Financial Advisors Should Consider Them for Income Portfolios
Explore how CEFs can enhance income strategies for your clients and how Modern Capital simplifies access to them.
Disclosure:
© 2025 Morningstar, Inc. All rights reserved. The Morningstar Rating™ is for the Class A only; other classes may have different performance characteristics. The rating is not a recommendation to buy, sell, or hold the fund. Morningstar does not guarantee its accuracy or completeness and is not responsible for damages or losses arising from any use of this information.
Investors should consider the Fund’s investment objectives, risks, charges, and expenses before investing. The prospectus, containing this and other information about the Fund, should be read carefully before investing. The prospectus is available at the download icon below or by calling 800-711-9164. Current and future holdings are subject to change and risk.
Investments in the Fund are subject to investment risks, including the possible loss of some or all of the principal amount invested. There is no assurance that the Fund will be successful in meeting its investment objective. The Fund is subject to the following additional risks:
▪ Active Trading Risk: Active trading may result in added expenses, a lower return, and increased tax liability. Since the Fund’s advisor engages in high turnover trading strategies, the Fund will have high portfolio turnover rates.
▪ Closed-End Fund Risk: Closed-end funds (CEFs) are subject to investment advisory and other expenses, which will be indirectly paid by the Fund resulting in duplicative fees and expenses. CEFs are also subject to management risk because the advisor to the underlying CEF may be unsuccessful in meeting the fund’s investment objective.
▪ Equity Securities Risk: Equity securities are subject to changes in value, and their values may be more volatile than those of other asset classes. These changes in value may result from factors affecting individual issuers, industries, or the stock market.
More information about these risks can be found in the Fund's prospectus.
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