Voya CEF Distributions and the Strategic Case for Dividend-Driven CEFs in a Volatile Market

In a low-yield environment where traditional income-generating assets struggle to meet investor expectations, closed-end funds (CEFs) have emerged as a compelling alternative. Voya Financial's suite of CEFs, including the Voya Global Equity Dividend and Premium Opportunity Fund (IGD) and Voya Emerging Markets High Dividend Equity Fund (IHD), exemplifies this trend. These funds offer elevated distribution yields but rely heavily on return of capital (ROC) to sustain payouts. This article evaluates the sustainability and tax implications of Voya's CEF distributions, contextualizing them within broader industry dynamics and macroeconomic shifts.

The Composition of Voya's CEF Distributions: A Double-Edged Sword

Voya's CEFs, such as IGD and IHD, have declared distributions in Q2 2025 that include a mix of ordinary income, capital gains, and ROC. For instance, IGD's August 2025 distribution of $0.050 per share is estimated to be 25% ordinary income and 75% ROC. Similarly, IHD's distribution is split 24% income and 76% ROC. While these yields appear attractive, the reliance on ROC raises critical questions about long-term sustainability.

ROC, defined as the return of an investor's original principal, is not taxable but reduces the cost basis of the investment. Over time, this can amplify capital gains taxes when the fund is sold or liquidated. For example, if an investor holds IGD and receives $0.350 in cumulative ROC over a year, their cost basis is effectively lowered by that amount, potentially triggering higher taxable gains in the future. This dynamic underscores the need for investors to scrutinize distribution sources, as ROC-heavy payouts may mask underlying performance weaknesses.

Tax Efficiency and the CEF Advantage

The strategic use of ROC in Voya's CEFs aligns with broader industry trends. In 2025, CEFs like Pioneer's Municipal High Income Advantage Fund (MAV) have increasingly allocated distributions to ROC, with 14.1% of year-to-date payouts classified as such. This approach allows funds to maintain high yields while deferring taxable gains—a critical advantage in a low-yield market. For Voya's CEFs, the tax-efficient structure is further enhanced by their focus on high-dividend equities and hedging strategies, which aim to balance income generation with volatility management.

However, the tax benefits of ROC come with caveats. Unlike ordinary income or capital gains, ROC does not reflect a fund's investment performance. If a fund's underlying assets depreciate, the return of capital may erode the investor's principal without compensating for losses. This risk is amplified in volatile markets, where CEFs often trade at discounts to net asset value (NAV). For instance, Voya's Infrastructure, Industrials and Materials Fund (IDE) has a 14.71% total return on NAV as of July 31, 2025, but its market price may still trade at a discount, complicating the interpretation of ROC as a performance indicator.

Broader CEF Trends: Leveraging ROC in a Low-Yield World

The use of ROC in Voya's CEFs reflects a macro-level shift in CEF strategy. With the S&P 500 yielding just 1.3% in 2025, investors are turning to CEFs for higher income, even if it means accepting ROC-heavy distributions. The S-Network All Taxable ex-Foreign plus Capped Muni CEF Index, for example, posted a 4.9% market-price return in Q2 2025, outperforming the Bloomberg U.S. Aggregate Bond Index (1.2%) but underperforming equities. This divergence highlights CEFs' role as a middle ground between bonds and equities, offering income with a tax-advantaged twist.

Leverage also plays a role in this dynamic. Voya's CEFs employ strategies like selling call options and hedging currency exposure to amplify returns. While these tactics can enhance yield, they also introduce complexity and risk, particularly in a rising interest rate environment. The Federal Reserve's rate stability in 2025 contrasts with the European Central Bank's rate cuts, creating a mixed global yield landscape that CEFs must navigate.

Investment Advice: Balancing Income and Risk

For income-focused investors, Voya's CEFs present a strategic opportunity—but with caveats. The key is to assess the fund's ability to generate sustainable income beyond ROC. For example, IGD's 10.63% annualized cumulative distribution rate is supported by its focus on global dividend-paying equities and options strategies. However, investors should monitor the fund's NAV performance and distribution sources to ensure that ROC does not dominate payouts.

Tax considerations are equally critical. Investors should consult advisors to understand how ROC affects their cost basis and future tax liabilities. Additionally, those with a long-term horizon may benefit from holding CEFs in tax-advantaged accounts to mitigate the impact of ROC on taxable gains.

Conclusion: A Nuanced Approach to CEF Investing

Voya's CEFs exemplify the dual-edged nature of ROC-driven distributions in a low-yield market. While these funds offer attractive yields and tax efficiency, their reliance on ROC necessitates careful due diligence. Investors must weigh the immediate benefits of high income against the long-term risks of capital erosion and tax implications. In a volatile market, CEFs like Voya's can serve as a valuable tool for income generation—but only when approached with a clear understanding of their structural complexities. As the CEF landscape evolves, those who prioritize tax-aware strategies and performance transparency will be best positioned to capitalize on these opportunities.