Municipal Bond Forum
Closed-end bond funds
Q
Why would an individual not invest in leveraged closed-end bond funds and pick up an additional 50 to 100 basis points of yield rather than buying individual bonds as well as professional bond management?
A
James A. Klotz responds:
There are a number of reasons why an investor might want to avoid closed-end funds. First, you need to be aware that the yield being quoted on the fund is not equivalent to the “yield to maturity” of an individual bond. Since the fund has no maturity date, it is quoted in “current yield,” which reflects the “cash on cash” return of the fund. The lack of a maturity date also eliminates the bonds’ promise to return the full face value of your investment.
If you research closed-end funds, you will find that the majority of them trade below their net asset value (the intrinsic value of the bonds held in the fund). This is the result of the leverage you mentioned – the lower the price goes, the higher the quoted yield.
There are also ongoing management fees, which are not applicable when you own the individual bonds. Although we like to see investors receive some professional help when building their portfolio, we see no benefit for investors to have an actively managed tax- free bond portfolio.
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This report is produced solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. This report is based on information obtained from sources believed to be reliable but no independent verification has been made, nor is its accuracy or completeness guaranteed.