Persistent, elevated inflation raises the likelihood of higher interest rates for longer. An elevated or rising rate environment creates pockets of opportunity within asset classes such as closed-end funds. Investors would do well to look to these strategies for income as rates hold.
Federal Reserve Chair Jerome Powell indicated that rates would remain elevated for longer at a policy forum in mid-April. “The recent data have clearly not given us greater confidence, and instead indicate that it’s likely to take longer than expected to achieve that confidence,” Powell said, reported CNBC.
The rising rate environment of the last two years generated prolonged market volatility. In such an environment, asset class dislocations became much more commonplace. For closed-end funds, it resulted in wider discounts.
A closed-end fund (CEF) launches with a set number of shares and does not create or redeem shares daily. Instead, they trade at a discount or premium to the value of the securities within the portfolio. CEFs trading at a discount create arbitrage potential for investors to capitalize on a potential narrowing discount.
Invest in Closed-End Funds With CCEF
The Calamos CEF Income & Arbitrage ETF (CCEF) launched in January 2024 and seeks to provide high monthly income as well as capital appreciation. The fund does so by investing in closed-end funds that generate income and trade at significant discounts. At launch, CEFs traded at an average discount of 11% compared to their 7% five-year average, according to Matt Kaufman, head of ETFs at Calamos Investments, in an interview on the NAVigator podcast at CCEF’s launch.
CCEF is actively managed, and Calamos brings over two decades of closed-end fund investing and 45 years of active investing in managing the fund. Calamos identifies and invests in CEFs trading at a steep discount that has potential to return closer to NAV over time. This creates arbitrage that the strategy captures.
Plenty of Investment Variety for CCEF
Higher rates for longer create the potential for further discount opportunities within CEFs. CCEF invests in the full spectrum closed-end funds in terms of asset class exposure, including – but not limited to - CEFs that hold municipal bonds, U.S. and international stocks, covered calls, and high yield securities. This creates strong diversification within the fund itself and allows CCEF to enhance broader portfolio diversification. Active management allows the fund to remain nimble in changing rate environments.
The fund also excludes Calamos-issued closed-end funds, providing unbiased exposure to the space. CCEF is fully transparent and holds 39 securities as of 05/10/2024.
“To have an active manager like Calamos screening that closed-end fund universe makes investing in CEFs significantly easier,” Kaufman explained. “Finding the ones we think have the best potential to close those discounts — that are also paying high monthly income along the way — is something that’s really resonated with a lot of advisors.”
CCEF generated a 30-day SEC yield of 7.16% and a distribution yield of 8.14% as of 03/31/2024. The fund has a management fee of 0.74%.
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Disclosure Information
Before investing, carefully consider the Fund’s investment objectives, risks, charges and expenses. Please see the prospectus and summary prospectus containing this and other information which can be obtained by calling 1-866-363-9219. Read it carefully before investing.
An investment in the Fund (s) is subject to risks, and you could lose money on your investment in the Fund (s). There can be no assurance that the Fund (s) will achieve its investment objective. Your investment in the Fund (s) is not a deposit in a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other government agency. The risks associated with an investment in the Fund (s) can increase during times of significant market volatility. The Fund (s) also has specific principal risks, which are described below. More detailed information regarding these risks can be found in the Fund’s prospectus.
Risks of investing in the Fund include risks associated with (1) the Fund’s investment in closed-end fund shares; (2) the closed-end funds’ investments; and (3) any other investments of the Fund, including investments in ETFs, BDCs, and derivative instruments. The shares of closed-end funds may trade at a discount or premium to, or at, their NAV. The securities of closed-end funds may be leveraged. As a result, the Fund, may be exposed indirectly to leverage through an investment in such securities. An investment in securities of closed-end funds that use leverage may expose the Fund to higher volatility in the market value of such securities and the possibility that the Fund’s long-term returns on such securities (and, indirectly, the long-term returns of its shares) will be diminished.
Additional Information
In addition, closed-end funds are allowed to invest in a greater amount of illiquid securities than open-end mutual funds. Investments in illiquid securities pose risks related to uncertainty in valuations, volatile market prices, and limitations on resale that may have an adverse effect on the ability of the Fund to dispose of the securities promptly or at reasonable prices. The Fund may invest in BDCs, which typically operate to invest in, or lend capital to, early stage-to-mature private companies as well as small public companies.
The Fund’s investment in shares of ETFs subjects it to the risks of owning the securities underlying the ETF, as well as the same structural risks faced by an investor purchasing shares of the Fund, including authorized participant concentration risk, market maker risk, premium-discount risk and trading issues risk. Derivatives are instruments, such as futures and forward foreign currency contracts, whose value is derived from that of other assets, rates or indices. The use of derivatives for non-hedging purposes may be considered more speculative than other types of investments.
Calamos Financial Services LLC, Distributor
NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE
Calamos Financial Services LLC
2020 Calamos Court | Naperville, IL 60563
866.363.9219 | www.calamos.com | [email protected]
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Calamos and Calamos Investments are registered trademarks of Calamos LLC.
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