In the closed end fund (CEF) landscape, investors tend to park here seeking income and diversification of their investments.  Some CEFs identify with this as an opportunity to create new funds specifically for this reason. One such development has been what is called a "fund of funds."  For the purpose of this article, a fund of funds is a CEF that invests in an aggregate number of CEFs usually to mimic an index.  This provides a diversify fund across many types of asset classes.  These funds can be a good option for investors seeking CEF diversification. The guesswork of single stock picking is alleviated and there is more liquidity in the ETF versus a single CEF.

There are a couple CEFs to evaluate that offer diversification but also high yield income can be attained.  Investors should focus on these CEFs for income generation and not so much for price growth.

In my active investing, I like to diversify my investments across various strategies. One investment I like is monthly dividend CEFs. I consider each distribution a paycheck and strive to create multiple streams to supplement my future income. I currently hold these investments in non-taxable accounts to compound my returns over time. You can add a few CEFs such as 3-5 to your portfolio. I reinvest the monthly dividends into CEFs to continue to increase the amount of income.  When retirement comes, each of these monthly check will enhance my other income streams.

Investors looking for an additional income source may want to consider one of these fund of funds. These investments are slow steady vehicles so if you are looking for high growth they probably are not for you. Also, they tend to have high expenses so these are not your low cost funds. But if you seek high yield, they are definitely worth a look.

POWERSHARES CEF INCOME COMPOSITE PORTFOLIO (PCEF) seeks investment results that generally correspond to the price and yield of the S-Network Composite Closed-End Fund Index. The fund generally invests at least 90% of its total assets in securities of U.S.-listed closed-end funds that comprise the underlying index. It is a "fund of funds," as it invests its assets in the common shares of funds included in the underlying index rather than in individual securities.

It currently has 138 CEF holdings in the fund which is skewed to the bond side of income (about 60% of assets).  It also includes several buy-write (covered call) funds, floating rates funds, preferred share funds and more. Since its inception date in 2010, it has grown net assets to $640 million.

The fund currently trades at $22.95 with a price increase of 13.85% over the last 52 weeks (and trading near its NAV).  It has a distribution yield of 7.71% with monthly distributions. Institutional ownership is around 30%. It has a Morningstar rating of 4 out of 5 stars.

YIELDSHARES HIGH INCOME (YYY) seeks to provide investment results that correspond generally to the price and yield performance of the ISE High Income Index. The fund will normally invest at least 80% of its total assets in securities of the index. Because the index is comprised of securities issued by other investment companies, the fund operates in a manner that is referred to as a "fund of funds," meaning that it invests its assets in shares of funds included in the index.

YYY is a much smaller fund with only $118 million in assets under management founded in 2012.  It currently has 31 holdings with a heavier focus on equities than PCEF. The fund currently trades at $18.83 with a price increase of 14.85% over the last 52 weeks (also trading near its NAV).  It has a distribution yield of 10.35% with monthly distributions. Institutional ownership is around 8%. It has a Morningstar rating of 3 out of 5 stars.

Bottom line: These fund of funds investments have a place in the income investors portfolio. While their expenses are high, they provide a significant amount of diversification in a single investment.  The monthly distribution and compounding add great value. It will be a bonus if you buy these CEFs on a price pullback as they have popped higher post election. You may also consider dollar cost averaging into these investments over an extended time period.