6. Closed-End Funds (5% - 8%)
What are they?
Closed-end funds sell a set number of shares and investment the money in stocks, bonds, loans, MLPs, and other types of securities. Most closed-end funds use leverage, or borrowed money, which is a double-edged sword. Depending on investor demand, a closed-end fund's price could be below or above its NAV.
What are the risks?
If a closed-end fund's NAV declines too much, driving its leverage ratio too high, it could violate regulatory limits, which would be forced to lighten its debt load by dumping assets and/or delaying or cutting dividends, like some MLP closed-end funds today.
Examples
- EV Senior Floating Rate (EFR): it trades at a discount to NAV and has a relatively high leverage ratio.
- Flaherty & Crumrine Dynamic Preferred & Income (DFP)
In next blogpost, we will discuss High Yield Bonds.