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  • CEFs...?

    I remember learning something about Closed-End Funds (CEFs) when I was perusing finance and investment literature to get some decent educational exposure.  I'm having a bit of a hard time figuring out exactly if and how to use them, though, or when to choose one over a similar MTF or ETF.

    In my inherited accounts from my grandfather there are a couple in there, BKT (an MBS fund) and DUC (corp bond fund).  I'm not a huge fan of these for a few reasons: I'm already a bit above my expected bond allocation anyway, to be evened out later this year by retirement contributions into equities, and I don't really have a good grasp exactly as to how these work.  Having a trading price different from NAV and having a significant amount of leveraged debt built into the fund is just a bit different than what I'm used to and makes it a bit odd to figure out how to use them properly.  I get that one of their primary points is to provide income (not thrilled to find one in a taxable), and that they're not subject to some of the regulations usual "open-ended" MTFs and ETFs are...

    I'm inclined to sell them since I can find better uses of them and since I don't need much fixed-income holdings at this point, but does anyone use CEFs, why, and to what extent?

  • #2
    If you wouldn't invest the same money in them tomorrow, you shouldn't keep the same money in them today.
    Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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    • #3
      www.cefa.com is a pretty good source of information on closed end funds.

      Closed end funds are pretty much just like open end funds except they don't directly buy and sell the shares from the investor. The shares trade on the stock exchange and can end up trading for more or less than the value of the underlying securities.

      If you look up a CEF on their site go straight to the details. Two of the most important pieces of information I look for are the premium/discount and % leveraged assets. BKT is a BlackRock income fund with a 6.5% discount and 26% leverage. If you want a bond fund, buy a bond fund. If interest rates go up this fund would get hurt more than an unleveraged fund. Leveraged funds were a big piece of the credit crunch problem. When nobody wanted to buy bonds the prices plummeted. It doesn't take long to get from 26% leveraged to 50% leveraged and a margin call.

      DUC is a Duff & Phelps Utility fund. It has a 5.5% discount and 31% leverage. They throw in a whopping 1.76% expense ratio.

      Please don't take this as investment advice. I'm only trying to highlight some important data.

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