I’m bending my rules a bit today — my pick isn’t exactly a stock, nor is it an exchange-traded fund (ETF). Instead, it’s a closed-ended fund, or CEF, which, for all intents and purposes, trades like a stock but offers far greater diversification along with monthly payouts.
The fund in question is Canoe EIT Income Fund (TSX:EIT.UN), which has been paying monthly income since August 7, 1997. As of June 5, 2024, it boasts an impressive yield of 8.6% with a fixed $0.10 monthly distribution.
Here’s everything you need to know about how it works and why it might be the right investment for your passive-income portfolio.
What is EIT.UN?
EIT.UN is one of Canada’s largest closed-ended funds, boasting $2.7 billion in assets under management. This figure represents the total capital that investors have committed to the fund, underscoring its popularity and scale.
The primary goal of EIT.UN is to maximize monthly income for its investors while also providing some potential for capital appreciation.
It aims to achieve this through a balanced investment approach, allocating its portfolio approximately 50/50 between U.S. and Canadian stocks.
Additionally, the fund employs leverage — borrowing up to 20% of its total assets. While this leverage can enhance returns, it also introduces a higher level of risk.
EIT.UN is focused on income generation and pays a monthly distribution of $0.10 per share. These payments can come from various sources, including dividends, capital gains, or even a return of capital.
It’s important to note the tax implications of these different types of income: in a Tax-Free Savings Account or Registered Retirement Savings Plan, the nature of the income does not affect its tax treatment, but in a non-registered account, each type of income may be taxed differently.
Performance-wise, EIT.UN has been impressive over the past five years. With dividends reinvested, the fund has returned 16.43%, significantly outperforming the S&P/TSX Composite Index, which returned only 8.86% in the same period.
What to know before you buy
It’s important to understand that EIT.UN is a CEF, not an ETF. One key feature of a CEF is that it issues a fixed number of shares at its initial public offering, and after that, these shares are bought and sold on the open market.
This structure can lead to the shares trading at a premium or a discount to the net asset value (NAV) of the fund, depending on market dynamics. Trading at a premium or discount is a function of supply and demand.
If more people want to buy the fund than sell it, the price can rise above the NAV (a premium). Conversely, if more people want to sell the fund than buy it, the price can drop below the NAV (a discount).
It’s crucial to check whether a CEF is trading at a premium or a discount before you buy. You generally don’t want to purchase a fund for more than the value of its underlying assets.
As of June 5, EIT.UN is trading at $13.88, while its NAV is $14.01. This means it’s trading at a discount, which can be calculated by comparing the market price to the NAV.
In this case, it represents a slight discount, indicating you’re buying the fund’s assets for slightly less than their current value, which is typically seen as a favourable buying opportunity.
