Closed-end funds (CEFs) are similar to ETFs, except that instead of issuing and redeeming shares as needed, CEFs issue a fixed number of shares at the IPO, explains Harry Domash, editor of Dividend Detective.

After that, CEF shares trade on the open market, just like stocks. CEFs have an added advantage over ETFs because unlike ETFs — they can use leverage (borrowed funds) to enhance returns. For instance, they might borrow at 2% to purchase bonds returning 4%. That's why closed-end funds often outperform ETFs focusing on the same market sector.

Another important difference is that unlike conventional mutual funds and ETFs that trade near the value of their holdings (net asset value), closed end funds usually trade above (premium) or below (discount) their net asset values. That's important because CEFs trading at discounts typically outperform those trading at premiums.

BlackRock Energy & Resources (BGR) holds 35 mostly US-based, large-cap energy exploration and production stocks. Its biggest holdings include Exxon Mobil (XOM) and Chevron (CVX). Based on market prices, the fund returned (share price changes plus dividends) 40% in 2021 and 25% year-to-date.

BlackRock raised its monthly payout by 17% in March and then by another 11% in May to $0.049 per share, which equates to a 5.1% dividend yield. It recently traded at a 13% discount to its net asset value, a significantly larger discount than its 9% three-year average.

Pimco Energy & Tactical Credit Opportunities (NRGX) invests at least 66% of assets in mostly US-based energy-related securities. Currently, energy pipeline owners comprise 52% of assets and independent exploration and production companies' account for 13%.

The fund says its top priority is capital appreciation as opposed to current income. Based on market prices, the fund returned 69% in 2021 and 21% year-to-date.

Pimco raised its quarterly distribution by 29% in March to $0.22 per share, which equates to a 5.8% distribution rate. Pimco recently traded at a 15% discount to its net asset value, about the same as its three-year 14% average.

Highland Income Fund (HFRO) holds a mix of stocks and debt instruments, mostly real-estate related, such as real estate investment trusts, preferred stocks, mortgage-backed securities, etc. The fund returned 16% in 2021 and 11% year-to-date.

Highland pays a $0.77 per share monthly distribution which equates to an 8.0% dividend yield. Highland recently traded at a 25% discount to its net asset value, somewhat larger than its 22% three-year-average.

These two energy sector CEFs should not be considered long-term holds. Instead, be prepared to sell when the energy sector losses steam. However, Highland Income is probably less susceptible to market swings. As always, historical performance doesn't predict the future. Do your own research; the more you know about your funds, the better your results.

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