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Some investors need to outperform the broad market in order to achieve their financial goals but they do not have the expertise or the time to engage in such an endeavor. These investors can resort to closed-end funds (CEFs) in order to achieve their goals.

Closed-end funds are similar to traditional mutual funds, as they both attract capital from multiple investors and use that capital to invest in a diverse portfolio of assets. However, unlike mutual funds, which can issue and redeem new shares as needed, CEFs have a fixed number of shares, which are issued at the time of the initial public offering. As a result, the price of a CEF is determined by the supply and demand on the stock exchange instead of the underlying value of the holdings of the fund.

Some CEFs offer above-average and fairly reliable dividends and thus they are great candidates for the portfolios of income-oriented investors. They also distribute their dividends on a monthly basis. In addition, some CEFs are managed by exceptionally competent fund managers and hence investors can take advantage of the skills of these experts.

On the other hand, most actively managed hedge funds, including CEFs, tend to underperform the S&P 500, with the underperformance becoming more dramatic over the long run. A great part of this underperformance results from the annual fees that CEFs charge to investors. Therefore, investors should examine carefully the historic performance and the fees of a CEF before initiating a stake in it. In this article, we will discuss the prospects of two CEFs, namely BlackRock Energy & Resources Trust (BGR) and Cohen & Steers Infrastructure Fund (UTF).
 

BlackRock Energy & Resources Trust

BlackRock Energy & Resources Trust aims to offer attractive total returns to its shareholders by investing at least 80% of its assets in companies related to energy and natural resources. The fund either buys the stocks outright or invests in futures or options of these stocks. It also sometimes tries to enhance its dividend yield by selling covered call options.

BlackRock Energy & Resources Trust currently has 99% of its funds invested in the energy sector, with large stakes in well-known oil majors. The top 5 holdings of the trust are Exxon Mobil (XOM), Chevron (CVX), Shell (SHEL), ConocoPhillips (COP), and TotalEnergies (TTE), with investment stakes of about 13%, 11%, 11%, 7%, and 6%, respectively.

Given its high exposure to the oil majors, it is easy to understand why BlackRock Energy & Resources Trust has outperformed the S&P 500 by a wide margin over the last 12 months (+17% vs. -16%).

Moreover, the trust is offering an above-average dividend yield of 5.6%, which is much higher than the 1.6% yield of the S&P 500. The trust also pays its dividends on a monthly basis and thus it may be more appealing to some income-oriented investors when compared to the stocks that distribute their dividends on a quarterly basis. However, investors should be aware that the dividends of BlackRock Energy & Resources Trust are more volatile and less predictable than the dividends of common stocks, which do their best to avoid dividend cuts.

It is also worth noting that BlackRock Energy & Resources Trust has underperformed the Energy Select Sector SPDR ETF (XLE) by a wide margin over the last 12 months (+17% vs. +39%). It is also remarkable that BlackRock Energy & Resources Trust charges a gross annual fee of 1.33% to its shareholders. This fee may seem low on the surface but it is likely to significantly reduce long-term returns.

Finally, it is important to keep the high cyclicality of the energy sector in mind. Oil and gas companies are thriving right now but their stock prices are likely to come under pressure whenever the next downturn in the sector shows up. Investors who are interested in BlackRock Energy & Resources Trust should probably wait for such a downturn before initiating a position in the fund.
 

Cohen & Steers Infrastructure Fund

Cohen & Steers Infrastructure Fund is a closed-end equity fund launched and managed by Cohen & Steers. It invests in public equity markets of the U.S., primarily in value stocks of infrastructure companies across all market capitalizations. The fund employs fundamental analysis to make its investments.

Cohen & Steers Infrastructure Fund is heavily invested in the utility sector, with 47% of its funds invested in this sector, while it also has significant exposure to the industrial sector (25% of funds), energy (16%), and real estate (10%). Its exposure to other sectors is negligible.

Just like BlackRock Energy & Resources Trust, Cohen & Steers Infrastructure Fund distributes its dividends on a monthly basis and hence it is an attractive candidate for income-oriented investors. The fund is offering a 7.4% dividend yield, which is highly attractive. Moreover, the fund has paid the same monthly dividend since the beginning of 2019. Therefore, investors should not expect meaningful dividend growth going forward. Instead, they should be aware that the dividend is not entirely safe, especially in the adverse scenario of a material recession.

Overall, Cohen & Steers Infrastructure Fund has some attractive characteristics, namely its investments in infrastructure companies, which are essential for the sustained prosperity of humanity, its monthly dividend payments, and its exceptionally high dividend yield.
 

Final Thoughts

Closed-end funds are attractive candidates for income-oriented investors thanks to their exceptionally high dividend yields, their monthly dividend payments, and the expertise of their managers. However, investors should carefully examine the performance of these funds over a long period, especially during a recession, and pay attention to the annual fees before investing in them.

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