This 1 Simple Trick Can Make CEF Management Fees Vanish

Forbes

27-05-2025

Wooden Blocks with the text: Fees
getty
Plenty of investors miss out on the huge yields (often north of 8%) that closed-end funds (CEFs) offer. There's one simple reason why: They get way too hung up on management fees.
We're going to look at a few reasons why that is today—and one easy way you can make those fees disappear entirely.
But first, just how high are the fees we're talking about? Well, the average fee for all CEFs tracked by my CEF Insider service is 2.95% of assets. In contrast, the largest ETF on the planet, the SPDR S&P 500 ETF Trust (SPY), has a fee of just 0.09%.
So, to be sure, we are talking about a big gap here.
But although CEFs' fees are much higher, there are many reasons why we shouldn't put too much weight on them when making buying decisions. Let's talk about those now.
SPY holds every stock in the S&P 500—in other words, the 500 large-cap companies that represent the biggest public firms in America. And while these stocks do well in good times, they can have rough runs, like we saw in April, for example.
That's why we want to make sure we're investing in assets beyond stocks, like corporate bonds. CEFs let us do that, and they give us access to smart human managers (not to mention high dividends), too.
An actual person at the helm is vital in a lot of these asset classes, and in particular corporate bonds, because deep connections are key to getting access to the best new issues.
We all know deep down that diversification works. But using CEFs to do it really can take things to another level, thanks in part to their high dividends. Look at the performance of the PGIM Global High Yield Fund (GHY), in purple below, since the start of 2025 to the time of this writing. GHY is a CEF Insider holding that yields an outsized 9.8%.
GHY Total Returns
Ycharts
As you can see, GHY outran SPY (in orange) while diversifying its shareholders beyond stocks and the US, too. In addition, the bond CEF barely fell below breakeven in April, while stocks were down 15%.
And bear in mind, as well, that these numbers are net of fees. Speaking of which, GHY's fees are far higher than those of SPY (1.5% of assets compared to 0.09%)
All that said, some CEFs do focus on S&P 500 companies, and still have higher fees, which brings me to my second point…
GHY, as mentioned, has total expenses of 1.5%, better than the CEF average but still quite high. Compare that to the Nuveen S&P 500 Dynamic Overwrite Fund (SPXX), an S&P 500–focused CEF whose fees are much less, at 0.97%.
But wait, if SPXX is focused on US large caps, why are its fees around 10 times those of SPY? It's largely because SPXX also sells call options on its holdings—or rights for investors to buy them at a fixed date and price in the future. The fund gets paid for these rights (and uses those fees to help fund its 7.7% dividend).
There's some cost and work attached to that strategy, hence the higher fees. But it's a small price to pay to get a dividend that's nearly six times that of SPY.
Currently, all CEFs covered by CEF Insider have an average yield of 9.1%, while SPY, as mentioned, yields 1.3%. In other words, a million dollars spread across all CEFs would get you over $90,000 in annual income, or $7,572 a month, versus less than $13,000, or about $1,075 monthly, from SPY.
Income Potential
CEF Insider
This is why many investors use CEFs to fund an early, or partial, retirement; if it takes $682,286 in savings to replace the average paycheck in America (as measured by the Bureau of Labor Statistics' median weekly earnings survey) with CEFs but a staggering $4.8 million saved with SPY, you can see why CEFs could attract more attention—and thus, CEF issuers can charge higher fees.
Now, here's the kicker: CEFs have an unusual structure that means they often trade for less than their assets are actually worth.
Let's say you have a CEF that has $100,000 spread across shares of NVIDIA (NVDA), Apple (AAPL) and Amazon.com (AMZN), among others, and the CEF has 10,000 shares in total. Each share is worth $10. Easy enough.
But CEFs are, as the name says, closed. That means CEF issuers can't issue new shares to new investors, so all of the shares trade on the public market, like stocks, and their market prices fluctuate based on investor demand, sometimes diverging from the actual value of the underlying holdings.
If that demand is higher than the actual market value of the CEF, it'll trade at a premium to its portfolio's net asset value, or NAV; if lower, it'll trade at a discount.
On average, CEFs trade at a 6% discount, according to CEF Insider data.
So if your CEF trades at a discount wider than its annual management fee, the discount can effectively offset the cost of that fee. And bear in mind that some CEFs are steeply discounted, with discounts of 10% or more.
It's worth pointing out that the fees are taken out of the CEF's portfolio by managers automatically as a matter of course; investors don't have to mail off a check.
Let's wrap with a quick recap, then: CEFs give you access to discounted, high-quality assets, far higher income than most ETFs, and they give you a high-income, low-cost way to diversify, too.
Plus, the best CEFs outperform their benchmarks—including the S&P 500. This is why CEFs are a passive income weapon that many wealthy investors are happy to keep in their arsenal.
Michael Foster is the Lead Research Analyst for Contrarian Outlook. For more great income ideas, click here for our latest report 'Indestructible Income: 5 Bargain Funds with Steady 8.6% Dividends.'
Disclosure: none