Closed End Funds Combine High Yield and Discount Investing Opportunities
Closed End Funds Combine high yield income opportunities with the ability to buy them at a discount for an added boost to investment returns.
How Closed End Funds Work
Closed End Funds (CEFs) trade on stock exchanges just like common equities and ETFs, but their share prices can deviate from their underlying net asset value (NAV) by trading at either a premium or a discount. For instance, if a CEF trades at a 10% discount to underlying NAV, investors can realize an added gain of over 10% if it returns to parity and even more if it moves to a premium.
Additionally, many CEFs rely on leverage, which is prohibited by law under the 1940 Investment Company Act for traditional mutual funds and ETFs, but this is allowed for CEFs. While investors rightfully bristle at the notion of leverage, when employed with caution and in the right context, the reliance upon leverage meaningfully boosts the returns of various CEFs. Let's face it - banks use leverage, blue chip companies use leverage, it was the irresponsible underwriting for subprime mortgages that caused the housing market to crash. And losses are magnified on the way down as they are on the way up for companies employing excessive leverage. But the notion of avoiding investments with any specter of leverage whatsoever is potentially overly cautious.
There's a whole universe of high yield CEFs that arises by this use of leverage in concert with a discount to NAV. Often times, these CEFs will yield well north of 5%, sometimes into the double digits. The NAV discount/premium phenomena is one that is difficult to explain and is often more a factor of investor fear and broader market conditions than anything easily explained with empirical data.
Master Limited Partnerships (MLPs) for High Yield
High Yield ETFs
High Yield Bonds
Return from Closed End Funds to Passive Income Investments