Similar to traditional open-end mutual funds, Closed-End ETFs distribute their earnings to shareholders in two ways. First, income dividends from interest or stock dividends are passed through to shareholders, net of expenses. Second, realized capital gains (net of realized capital losses) distributions are passed through to shareholders (typically once a year in November or December).
However, several leveraged Closed-End ETFs also have managed distribution policies for their common shareholders. That is, the fund promises to distribute a fixed portion of their net asset value each year. A fund may institute this policy to differentiate itself from competitors and to attempt to narrow the gap between price and net asset value.
However, fixed payout plans put pressure on fund managers to meet their payment obligations. During market downturns, if the fund does not have sufficient income and realized gains, it would need to pay these distributions from capital, reducing its asset base. ... more.
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