Ever since the first U.S.-listed exchange traded fund (ETF) launched in January 1993, the number of investable products competing for a finite pool of investor capital has steadily increased.
That competition has fueled rapid innovation in ETFs, but it's also contributed to the decline of older fund structures. Mutual funds, in particular, have steadily lost ground.
In November 2025, the Federal Reserve published data comparing ETF and mutual fund flows. A net inflow means more money entered a fund category than left it over a given period, while a net outflow means investors pulled more capital out than they added.
The long-term pattern is clear. ETF inflows have accelerated since the early 2000s, while mutual fund outflows have also grown. Investor preference, especially among younger generations, has strongly shifted toward the former.
Framing this trend purely as a battle between ETFs and mutual funds, however, leaves out other fund types that have fallen out of the spotlight. Chief among them are closed-end funds, or CEFs.
Today, CEFs rarely come up outside of year-end tax-loss harvesting discussions or income-focused investor circles, yet some have long track records and enviable yields.
At the same time, they are structurally different from both ETFs and mutual funds. Those differences introduce unique risks tied to leverage, premiums and discounts and taxes.
For investors considering CEFs, understanding those mechanics is essential.
Here's what you need to know about closed-end funds, including the best CEFs to buy in 2026.
Your 2026 closed-end fund crash course
Closed-end funds are defined by four basic features: the ability to trade at discounts or premiums to net asset value (NAV); high yields via managed distribution policies; access to less liquid assets; and the use of leverage.
When demand rises for a mutual fund or ETF, new units can be created. Mutual funds do this by taking in new capital and buying additional securities, while ETFs rely on authorized participants to assemble creation units through the in-kind creation and redemption process.
For ETFs, the mechanism creates arbitrage incentives that keep the market price closely aligned with its NAV per share, which is total assets minus liabilities divided by shares outstanding.
CEFs operate differently. The number of shares is generally fixed at inception, aside from possible secondary or rights offerings. Because there is no ongoing creation or redemption mechanism, CEFs can trade at prices that diverge materially from NAV.
For example, a CEF with $15 per share in underlying assets may trade at $17 if demand is strong, or at $13 if investor interest is weak.
These premiums and discounts can work for or against investors. Buying at a wider-than-normal discount and later seeing it narrow can add to returns, but there is no guarantee this ever happens.
One common way investors monitor this is through a Z-score, which measures how far today's premium or discount deviates from its historical average.
Income is another defining feature of many CEFs.
CEFs are frequently structured to deliver high and steady payouts. Those distributions can come from multiple sources: portfolio income, such as dividends or bond coupons; option strategies, like covered calls; or from realized capital gains via selling appreciated securities.
In many cases, however, CEF distributions also include a sizable return of capital portion, which isn't immediately taxable and decreases your adjusted cost basis.
Return of capital can be constructive when used to smooth uneven cash flows via a managed distribution policy, but it can also be destructive if a fund consistently pays out more than it earns, leading to NAV erosion.
The closed-end structure also gives CEF managers more flexibility to own less liquid assets such as private credit or private equity. In contrast, open-end funds have to manage daily inflows and outflows, which creates a constant need for liquidity.
If redemptions spike, a mutual fund may be forced to sell holdings to raise cash, and an ETF can face stress in the underlying market if authorized participants struggle to source or offload illiquid positions during the creation and redemption process.
CEFs don't have to meet daily redemptions because shares trade between investors on an exchange, which reduces the pressure to keep every position readily sellable.
That doesn't eliminate liquidity risk, but it can make it easier to hold assets that would be impractical in a fully open-ended format.
Leverage is the final major quirk that tends to polarize CEF investors. Many CEFs borrow against their assets to amplify returns and income. A fund with $1 billion in assets that borrows an additional $100 million is effectively leveraged about 1.1 times.
Leverage can enhance performance and boost yields, but it also magnifies losses and introduces borrowing costs. Those costs are one reason CEF expense ratios are typically higher than those of ETFs. None of these traits are inherently good or bad. They simply make CEFs different from mutual funds and ETFs.
Whether closed-end funds are appropriate for you depends on your experience, risk tolerance, tax situation and how actively you are willing to monitor them.
How we picked the best CEFs for 2026
Our goal was not to simply rank CEFs by recent performance, headline yields or how wide a discount to net asset value happens to be today.
Instead, we focused on identifying five best-in-class CEFs that strike a reasonable balance across different strategies, asset classes and risk profiles.
That meant looking beyond short-term metrics and emphasizing characteristics that matter to long-term investors.
One of the most important filters was longevity and scale. We prioritized CEFs that have been operating for many years and have reached a size that reduces the risk of liquidation or forced restructuring.
To that end, we generally limited our selections to funds with at least $1 billion in assets under management.
While size alone doesn't guarantee quality, it often reflects sustained investor demand, operational stability and better trading liquidity in the secondary market.
Beyond that, our approach was largely discretionary and editorial in nature. For each fund, we focused on transparency and investor understanding rather than rigid screening rules.
We highlight key data points such as expense ratios, current distribution rates, premiums or discounts to NAV, and leverage employed to provide context.
The result is not a formula-driven list, but a curated selection designed to help investors understand what they are buying and why a given CEF may or may not belong in a long-term portfolio.
- Assets under management: $3 billion
- Expense ratio: 0.50%
- Price vs. NAV: -6.6% discount
- Distribution rate (price): 7.87%
- Leverage employed: 0%
The Adams Diversified Equity Fund (ADX) is among the oldest listed entities on the New York Stock Exchange, dating back to 1929. Before becoming a CEF, it operated as Adams Express, a stagecoach company that successfully reinvented itself as an investment company once railroads displaced its original business.
ADX follows a straightforward mandate: actively managed, U.S. large-cap stocks with characteristics broadly similar to the S&P 500 and a clear long-term orientation.
One of its defining features is its managed distribution policy. Historically, ADX paid modest quarterly distributions followed by a large year-end payout tied to realized capital gains. More recently, it shifted to a smoother structure targeting 2% of NAV per quarter, or roughly 8% annually.
ADX also stands out for its low cost within the CEF universe. With a 0.50% expense ratio, a $10,000 investment incurs about $50 per year in fee drag, which is unusually modest.
Finally, unlike many CEFs, ADX does not use leverage at all. And, over the past decade, the fund has delivered a 15.3% annualized return based on NAV.
Learn more about ADX at the Adams Funds website.
- Assets under management: $6.7 billion
- Expense ratio: 1.67% (4.46% including interest expense)
- Price vs. NAV: +4.91% premium
- Distribution rate (price): 14.64%
- Leverage employed: 31.04%
The PIMCO Dynamic Income Fund (PDI) is run by PIMCO, a firm with a long history in bond management and a brand that still carries weight with many income investors. The fund's mandate is flexible, and it typically builds its portfolio across multiple higher-yielding credit sectors rather than sticking to plain-vanilla investment-grade bonds.
In practice, that often means meaningful exposure to non-investment-grade corporate credit, or junk bonds, alongside securitized holdings such as non-agency mortgage-backed securities and other structured credit, with the mix shifting as PIMCO's managers see relative value.
The other defining feature is leverage. For every $100 of investor capital, PDI is currently borrowing roughly $31 to increase exposure. Pairing leveraged exposure with a portfolio tilted toward higher-yielding credit is a big part of how the fund supports its 14.64% distribution rate.
However, investors still need to pay attention to valuation and cost. PDI often trades at a premium to NAV, reflecting both its popularity and PIMCO's reputation, and that premium can widen or narrow independent of what the underlying holdings are doing.
As of writing, the fund trades at a +4.91% premium, which is notably lower than its 52-week high premium of +17.57% as of December 24.
The stated expense ratio is 1.67%, but once interest expense tied to leverage is included, total costs rise to 4.46%, which can be a drag.
Learn more about PDI at the PIMCO provider site.
- Assets under management: $1.3 billion
- Expense ratio: 1.98% (2.82% including interest expense)
- Price vs. NAV: −7.15% discount
- Distribution rate (price): 10.71%
- Leverage employed: 16.64%
CEFs like Tortoise Energy Infrastructure (TYG) once allowed investors to gain master limited partnership (MLP) exposure without the complexity of Schedule K-1 tax forms by sending unitholders a single Form 1099-DIV.
TYG continues to follow this legacy approach, offering exposure to energy "middlemen" in a tax-simplified wrapper, with a portfolio spanning natural gas infrastructure, liquids pipelines and power infrastructure assets.
Despite its reputation as an MLP-focused fund, MLPs make up only about 20% of the portfolio today. The remaining roughly 80% consists of common equity holdings, primarily midstream energy stocks.
The fund's high distribution rate reflects both the income-oriented nature of the midstream sector and the pass-through characteristics of MLPs, in addition to the use of leverage and return of capital.
Learn more about TYG at the Tortoise Capital provider site.
- Assets under management: $3.5 billion
- Expense ratio: 0.94% (2.43% including interest expense)
- Price vs. NAV: +0.33% premium
- Distribution rate (price): 6.5%
- Leverage employed: 17.8%
TYG is not the only sector-specific closed-end fund investors gravitate toward for income. Another long-standing and widely followed option is the Reaves Utility Income Fund (UTG), which applies a similar closed-end structure to utility stocks.
The portfolio primarily holds dividend-paying stocks, but it can also allocate to preferred stock and bonds, giving the managers flexibility across the utility capital structure.
UTG makes meaningful use of leverage, currently around 17.8% of total assets. That leverage helps boost income potential, but it also raises interest expense and introduces sensitivity to rising interest rates.
Utilities can face headwinds in higher-rate environments because they are capital-intensive businesses that rely on borrowing, and their cash flows tend to be less attractive when yields elsewhere rise.
Despite those risks, UTG has delivered solid long-term results for investors willing to hold through cycles. Over the past 10 years, the fund's net asset value has compounded at an annualized rate of 10.36%.
While the current 6.5% distribution rate is not the highest among CEFs, the payout has historically been sustainable. And the distribution is paid monthly, which appeals to income-focused investors seeking consistency.
Learn more about UTG at the Reaves provider site.
- Assets under management: $9.7 billion
- Expense ratio: 0.48%
- Price vs. NAV: −3.84% discount
- Distribution rate: 0%
- Leverage employed: 0%
The closed-end fund structure is also well suited to holding commodities, not just equities and fixed income.
One of the most recognizable issuers in this space is Sprott, a specialist asset manager focused on precious metals and mining-related investments. Sprott's lineup of physically backed commodity CEFs spans gold and silver as well as platinum, palladium, uranium and copper.
The Sprott Physical Gold and Silver Trust (CEF) combines physical gold and silver in a single vehicle, with the current allocation split at roughly 64% gold and 36% silver.
It does not use leverage, and it does not pay a distribution. That simplicity makes it appealing as a satellite allocation for investors seeking direct exposure to precious metals.
CEF also tends to trade closer to its NAV than many competitors, and it's currently available at only a modest discount. With a 0.48% expense ratio, it ranks among the more affordable CEFs, even undercutting even the venerable ADX.
Learn more about CEF at the Sprott provider site.
