When Calamos brought its ETF-of-CEFs to market in January, it drew on the expertise gained during its 20-year history in the closed-end fund space. The actively managed Calamos CEF Income & Arbitrage ETF (CCEF) has the dual goal of providing investors with high levels of monthly income as well as capital appreciation. And the timing of its debut is beneficial to both of those purposes.
Closed-end funds (CEFs) are distinguished by their discounts and premiums to NAV and the arbitrage opportunities they can offer. Such disconnections between the actual value of the portfolio (the NAV) and the price at which it trades happen because CEFs, unlike open-ended funds, launch with a fixed number of shares. While ETFs or mutual funds create or redeem shares based on shareholders’ daily supply and demand pressures, CEFs, with a fixed number of shares, must rely on the market price to reflect investor demand. As of the end of 2023, the median discount for U.S.-listed CEFS was 11.8%, according to Morningstar.
CEF Discounts: A Time for Income
When CEF discounts widen, historically, their distribution rates rise. This is much like when a bond’s yield rises when priced below par. We saw discounts widen as interest rates rose in 2023, creating significant opportunities for income-seeking investors. Morningstar data indicates that in 2023, US-listed CEFs’ average distributions were greater than those of other income-producing categories. That includes those produced by high-yield bonds. According to Morningstar, as of 12/31/2023, CEFs offered distributions of 7.29%, while high-yield bonds yielded 6.21%.
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Thus, with CEF discounts currently deeper than their long-term averages, CCEF managers have the opportunity to deliver attractive monthly distributions to their shareholders while maintaining a well-diversified portfolio, drawing from CEFs investing in multiple asset classes and investment categories. Indeed, as of 3/27/2024, CCEF’s largest holding has a three-year average discount of more than 16%.
Discounts Also Lay the Foundation for Capital Appreciation
Wider discounts also align with CCEF’s focus on capital appreciation. According to the fund prospectus, its managers seek out CEFs trading at steep discounts for the Fund’s portfolio. That’s with the intention of holding them until the discount narrows to the point that it “no longer represents an unusual divergence” from the NAV. Even if a fund’s discount only narrows rather than turns into a premium, upward price movements still leave the potential for significant upside.
CCEF’s dual objectives have the potential to provide enhanced outcomes for investors. As of 4/4/2024, CCEF includes 35 CEFs selected by two portfolio managers with more than 50 years of industry experience between them.
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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.
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