(Image credit: Getty Images)
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.
Framing this trend as a battle between ETFs and mutual funds 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.
Structurally different from both ETFs and mutual funds, CEFs introduce unique risks tied to leverage, premiums and discounts and taxes.
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.
The number of CEF 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.
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.
Income is another defining feature. 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.
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.
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.
How we picked the best CEFs for 2026
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.
We prioritized CEFs that have been operating for many years and have reached a size that reduces the risk of liquidation or forced restructuring. And we generally limited our selections to funds with at least $1 billion in assets under management.
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.