Closed-end funds had a market-price return of 20.0% in 2025, as measured by the S-Network All Taxable ex-Foreign plus Capped Muni CEF Index1. By comparison, the S&P 500 Index2 and the Bloomberg U.S. Aggregate Bond Index3 had total returns of 17.9% and 7.3%, respectively.
Investment Review
Closed-end funds delivered a solid total return for the year, supported by declining interest rates and resilient economic growth. The first half of the year saw heightened uncertainty as U.S. tariffs reached historic highs. However, sentiment improved as the year progressed, aided by tariff exemptions and supportive central bank policies. The Federal Reserve cut rates three times in the second half, lowering the federal funds rate to a range of 3.50%–3.75%, while the European Central Bank trimmed its key rates by 100 basis points over the year. As a result, both 2-year and 10-year U.S. Treasury yields, while at times volatile, trended lower during the year. Economic growth generally exceeded expectations, resulting in credit spread compression across U.S. and European markets.
All the three major closed-end fund categories posted positive returns, with equity funds being the top performer followed by the tax-free municipal bond group and the fixed income group. With respect to valuations, overall closed-end fund discounts to net asset value (NAV) tightened from –3.8% to – 2.8%.
Equity funds gained under a broadly supportive environment for risk assets, underpinned by strong corporate earnings, tightening of discounts and expectations of monetary easing. Among sector-specific strategies, single-commodity funds (focused on precious metals) emerged as standout performers. Prices surged as investors sought safe-haven opportunities amid a weak U.S. dollar and anticipated rate cuts. Diversified commodity funds also led the way, benefiting from favorable supply/demand dynamics. Structural trends such as electrification, AI-driven power requirements, and industrialization in emerging markets are creating sustained demand for key resources.
Tax-free municipal bond funds, composed largely of long- duration, rate-sensitive assets, benefited from the decline in Treasury yields. The group also experienced a significant improvement in valuations as discounts narrowed meaningfully, contributing to strong market returns.
Taxable fixed income funds delivered strong returns, supported by a lower-rate environment. However, gains were tempered by notable premium compression over the year, with the funds now trading at a modest discount, close to their long-term average. Emerging market bond funds led the performance as the U.S. dollar weakened against most currencies. Convertible bond funds, which are sensitive to equity markets, also posted solid gains. Preferred funds benefited from declining interest rates and strong corporate fundamentals. In contrast, bank loan funds—comprising floating-rate assets—declined, as incremental Fed rate cuts and expectations of further easing reduced income potential, which in turn led to a widening of discounts to NAV. This was offset somewhat by tight credit spreads, signaling continued confidence in solid economic fundamentals.
Investment Outlook
The backdrop for risk assets and for closed-end funds has become increasingly uncertain. The Trump administration’s tariff policy had heightened concerns about future economic activity and the labor market. However, the recent delay in the tariffs has provided some short-term relief. That said, inflation concerns stemming from those tariffs remain. Looking ahead, the extent of rate cuts in 2026 will continue to depend on the pace of economic growth and labor market trends. While the economy is perceived to be in a solid state, the risks have increased significantly. Valuations are becoming more fully priced, prompting a selective approach to identifying relative value. Monetary and fiscal policy specifics from the administration remain a key factor to consider, as is the appointment of a new Federal Reserve chairperson. Despite these uncertainties, companies are showing increased confidence in providing forward-looking guidance, which suggests potential growth and job creation.
The primary market for closed-end fund IPOs remains closed and will likely stay quiet until positive performance and more confidence in the future path of interest rates take hold. However, incremental capital raises have commenced through rights offerings, which often create short-term price dislocations and tactical opportunities. The tighter valuations within the taxable fixed income space may bring opportunities for these incremental capital raises into focus.
(1) Returns are based on market price. Prior to 7/31/19, the benchmark was the Morningstar US All Taxable Ex-Foreign Equity Index. Thereafter, it is the S-Network All Taxable ex-Foreign plus Capped Muni CEF Index. The S-Network All Taxable ex-Foreign plus Capped Muni CEF Index is a market capitalization-weighted index comprising all taxable closed-end funds and Diversified Municipal Bond Funds, except for single-country funds and region-specific equity funds. The Morningstar US All Taxable Ex-Foreign Equity Index measures the market-capitalization-weighted total return of taxable equity and fixed income closed-end funds; it excludes international, regional and country closed-end funds. Index returns update frequently and are subject to change. All closed-end fund sector returns are based on Cohen & Steers calculations and classifications of the current U.S. listed closed end fund universe.
(2) The S&P 500 Index is an unmanaged index of 500 large capitalization, publicly traded stocks that is frequently used as a general measure of stock market performance.
(3) The Bloomberg U.S. Aggregate Bond Index includes U.S. government, corporate and mortgage-backed securities with maturities of at least one year. Benchmark returns are shown for comparative purposes only and may not necessarily be representative of the Fund's portfolio.
Data quoted represents past performance, which is no guarantee of future results. Risk of loss is possible.
The S-Network All Taxable ex-Foreign plus Capped Muni CEF Index is a market capitalization-weighted index comprising all taxable closed-end funds and Diversified Municipal Bond Funds, except for single-country funds and region-specific equity funds. The index reconstitutes and rebalances quarterly.
Index Source: S-Network Closed End Fund Indexes are calculated, distributed and marketed by S-Network Global Indexes Inc. which have been licensed for use. All content of the S-Network Closed End Fund Indexes 2025 are the intellectual property of S-Network Global Indexes Inc.
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The views and opinions in the preceding commentary are as of the date of publication and are subject to change. There is no guarantee that any historical trend discussed above will be repeated in the future, and there is no way to predict precisely when such a trend might begin.
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