New York-based alternative investment firm Saba Capital has launched the Saba Closed-End Funds ETF (Bats: CEFS), an actively managed ETF providing a high level of income by investing in closed-end funds trading at a discount to net asset value (NAV). The fund, Saba’s first venture into the ETF-provider space, also provides a built-in hedge to the risk of rising interest rates.

Boaz Weinstein, Founder and Chief Investment Officer at Saba.

Closed-end funds are collective investment models based on issuing a fixed number of shares which are not redeemable from the fund. These listed investment vehicles often trade at a premium or discount to NAV as a result of market technicals and sentiment. Through active management, the ETF will attempt to exploit pricing irregularities of the closed-end funds.

Saba will target fixed income and equity closed-end funds trading at a discount to NAV, given they typically offer higher yield and return potential than the underlying securities.  A small portion of that excess return is utilized to finance the portfolio’s interest rate hedge.

“Many closed-end funds are trading at an attractive discount to their net asset value,” said Boaz Weinstein, Founder and Chief Investment Officer at Saba. “In an environment where investors are searching for yield, we believe closed-end funds offer high income and a margin of safety due to the discount.”

Saba Capital’s investment process includes proprietary models that dynamically rank closed-end funds across a variety of factors, including yield, discount to NAV and quality of underlying securities.  The ETF seeks to outperform index-based closed-end fund products by actively trading the portfolio in an attempt to capture the widening and narrowing of discounts to net asset value.

The ETF has total annual fund operating expenses of 2.42% (composed of 1.10% management fee and 1.32% other fund fees).