Investors may have a desire to further diversify holdings towards alternative investment styles with a penchant for higher yields. This is the foremost objective behind ETFs that invest in a basket of closed-end funds (CEFs), notes fund expert David Fabian, editor of The Flexible Growth and Income Report.

CEFs are pooled investment vehicles with set share amounts that can trade at a premium or discount to their underlying net asset value.

Furthermore, they often employ leverage, options, and other sophisticated portfolio management techniques to boost their yields for shareholders.

The following ETFs invest in a broad range of CEFs for those investors that want to enhance the yield of their portfolio or seek out varying asset classes.

PowerShares CEF Income Composite Portfolio (PCEF)

PCEF is the largest and perhaps most well-known fund in this category. This ETF has $667 million dedicated to an index of 140 closed-end funds.

The benefit of a fund like PCEF is that you get highly diversified exposure to virtually every corner of the closed-end fund market. It’s like owning the benchmark for this investment group.

The portfolio is allocated approximately 33% towards stock or option income strategies and 67% towards high yield fixed-income. The current 30-day SEC yield is a generous 7.31% and income is paid monthly to shareholders.

PCEF currently sports a weighted average discount of -6.44% to its net asset value, which is on the high side in relation to its historical average.

YieldShares High Income ETF (YYY)

YYY is another fund that has grown in popularity over its nearly four-year history. This ETF has $150 million dedicated to a more concentrated mix of just 30 holdings. The YYY portfolio is constructed by screening for CEFs based on fund yield, discount to net asset value, and overall liquidity.

The end result is a unique mix of securities with the flexibility to change as the attributes of these underlying funds evolve. Think of it as a “smart beta” alternative to a more diversified and passive index. The current asset allocation is 25% stocks and 75% bonds.

YYY offers a 30-day SEC yield of 7.03% and its average discount is -8.01%. Dividends are paid monthly to shareholders as well.

VanEck Vectors CEF Municipal Income ETF (XMPT)

Investors that are looking for high yields in their taxable accounts may be drawn to a fixed-income fund like XMPT. This ETF has $78 million invested in a group of 70 diversified municipal bond CEFs.

The purpose of this fund is to generate higher yields than a traditional muni ETF or even index mutual funds because of the use of leverage within the CEFs. It may also own riskier credit securities in order to boost their yields as well.

The current 30-day SEC yield is listed at 5.09%, which produces a taxable equivalent yield of 7.07% at a 28% Federal tax rate. XMPT charges a management fee of 0.40% and its net expense ratio is listed at 1.56%.

Muni bonds have traveled a volatile path over the last twelve months. Nevertheless, those with a higher risk tolerance may find that a small tactical allocation to XMPT provides an attractive income stream.

First Trust CEF Income Opportunity ETF (FCEF)

With FCEF we begin to explore the world of active security selection in closed-end funds. First Trust released this ETF in late-2016; the portfolio currently owns 40 CEFs selected by the fund managers according to their objectives of current income and capital appreciation.

The prospectus gives the managers wide leeway in selecting their portfolio based on fundamental and technical analysis. The fund can hold both U.S. and foreign stocks, alongside virtually every corner of the CEF bond universe.

FCEF comes with a management fee of 0.85% and total net expense ratio of 2.50%. The latest fact sheet identifies the portfolio in 25% stocks and 75% high yield bond and fixed-income producing assets. The weighted average discount is -7.10% and the 30-day SEC yield is 6.38%.

Bottom line, it’s always worth remembering that higher yields also encumber a higher risk of invested capital. The ETFs mentioned above are not for everyone and will be most appropriate as small, tactical positions within a more diversified income portfolio.

Subscribe to David Fabian's The Flexible Growth and Income Report here...