Leveraging Closed-End Fund ETFs for High-Yield Income and Discount Arbitrage

The rise of closed-end fund (CEF) ETFs like the Invesco CEF Income Composite ETF (PCEF) and the Calamos CEF Income & Arbitrage ETF (CCEF) has redefined how investors access high-yield income and arbitrage opportunities. These ETFs combine the flexibility of active management with the liquidity of ETFs, enabling investors to capitalize on deep CEF discounts while generating consistent cash flow. By dissecting their strategies and performance, we uncover how these vehicles navigate the unique dynamics of the CEF market.

The CEF ETF Landscape: Active vs. Passive Strategies

PCEF and CCEF represent two distinct approaches to CEF investing. PCEF, a passive ETF, tracks a basket of taxable CEFs with a focus on investment-grade fixed income, high-yield bonds, and equity option CEFs. Its methodology prioritizes funds trading at wider discounts to net asset value (NAV), a strategy that historically correlates with higher returns [2]. For instance, PCEF’s year-to-date return of 10.32% as of August 2025 underscores its effectiveness in leveraging deep discounts [1]. The fund’s concentrated exposure to managers like BlackRock—whose CEFs now constitute 25% of its top holdings—highlights its ability to exploit market inefficiencies [2].

In contrast, CCEF employs active management to identify CEFs with attractive discount arbitrage potential. Launched in 2024, CCEF has delivered a 17.04% annualized return as of June 2025, outpacing its Relative Value Arbitrage category average [1]. Its strategy hinges on buying CEFs trading at significant discounts and selling them as valuations normalize, a tactic that amplifies total returns. For example, CCEF’s 8.00% distribution yield, paired with a 0.11% NAV discount as of August 2025, illustrates its dual focus on income and capital appreciation [1].

Discount Arbitrage: A Dual-Edged Sword

Both ETFs exploit the premium/discount mechanism inherent to CEFs. PCEF’s passive approach benefits from structural inefficiencies in the CEF market, where discounts often persist due to liquidity constraints or market sentiment [2]. Conversely, CCEF’s active strategy allows it to dynamically adjust holdings, capitalizing on short-term mispricings. For instance, CCEF’s 33.1% concentration in its top 10 holdings enables targeted bets on undervalued CEFs, though this non-diversified approach increases volatility [1].

However, discount arbitrage is not without risks. PCEF’s exposure to excessive premiums—common in equity CEFs—can lead to distribution cuts, as seen during market downturns [2]. CCEF mitigates this by focusing on CEFs with strong distribution sustainability, though its 0% portfolio turnover rate suggests a long-term holding strategy that may underperform in rapidly shifting markets [1].

Income Generation and Investor Appeal

High-yield income remains a cornerstone of CEF ETFs. PCEF’s 30-day SEC yield of 8.06% and CCEF’s 8.00% distribution yield position them as compelling options for income-focused investors [1]. PCEF’s emphasis on taxable CEFs, however, introduces tax inefficiencies, particularly in non-qualified accounts [2]. CCEF’s active management allows it to balance income with tax optimization, though its non-diversified structure may limit broad accessibility.

Conclusion: Strategic Allocation in a Dynamic Market

For investors seeking to harness CEF discounts and income potential, PCEF and CCEF offer complementary strategies. PCEF’s passive, diversified approach suits those prioritizing liquidity and broad exposure, while CCEF’s active, concentrated bets appeal to risk-tolerant investors aiming for higher returns. As the CEF market evolves, these ETFs exemplify how innovative wrappers can transform niche strategies into mainstream opportunities.

Source:
[1] CCEF - Calamos CEF Income & Arbitrage ETF [https://www.calamos.com/funds/etf/calamos-cef-income-and-arbitrage-ccef/]
[2] 15 Years of PCEF: An ETF of CEFs [https://www.etftrends.com/15-years-pcef-etf-cefs/]