Income investors with large taxable accounts are consistently focused on maximizing their total return and minimizing the impact of taxes on their nest egg. That means seeking out funds that are sensitive to the type of income they produce and the implications of using capital losses to offset gains.
Exchange-traded funds (ETFs) are one avenue for investors to consider in this pursuit. Many ETFs that track a passive index have low portfolio turnover rates and often pay little to zero capital gains at year-end. These make for a truly inexpensive and effective vehicle for tax-conscious investors that want diversified stock or bond exposure.
Those who may be searching for a more active strategy or one that offers a higher yield may be interested in tax-advantaged closed-end funds (CEFs). These more aggressive funds offer the ability to own a diversified basket of stocks with the ability to employ leverage and more creative portfolio construction methods.
The following are several CEFs that seek to provide both growth and income with a tax-efficient objective.
Eaton Vance Tax-Advantaged Global Dividend Income (NYSE:ETG)
Eaton Vance Tax-Advantaged Global Dvd. (NYSE:ETG) is part of a suite of three Eaton Vance equity-income CEFs that focus on tax-advantaged investment strategies. This fund is designed to offer true global exposure, with approximately 120 underlying holdings and only 50% of the portfolio dedicated to U.S. stocks. The remaining allocations are split among foreign stocks, corporate bonds, and preferred stocks.
The fund has $1.6 billion in market float and sports a current yield of 8.17%. Dividends are paid monthly to shareholders, which is an attractive feature for income-seeking investors. The fund is currently trading at an 8% discount to its net asset value, which is close to its 3-year average. It is also employing an effective leverage of 25% per the last company disclosure.
Eaton Vance Tax-Advantaged Global Dvd. (NYSE:ETG) claims to target stocks that pay qualified dividend income and takes the opportunity to harvest capital losses when appropriate. They are also sensitive to managing the sales of highly appreciated positions within the portfolio to try and maximize the use of long-term capital gains when applicable. The goal is a high level of total return (income and capital appreciation) on an after-tax basis.
I currently own ETG for clients of my wealth management firm with dedicated closed-end fund accounts. The combination of tax-efficiency and the access to a world stock allocation are attractive features within a diversified income portfolio. It’s my belief that a measure of foreign stock exposure will be a key driver of growth should we see the performance gap narrow between U.S. and international indexes this year.