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Explorer ○○

Why so few investment grade taxable CEFs?

I wonder why there are so few investment grade taxable CEFs?  I can think of only a handful of solidly IG -- MIN, MGF, JHS, BHK, NBB, BBN, EGF, BKT, DUC.   Marginally IG might be TSI, WIW, WIA, BTZ, WEA, GDO, JMM, DBL, JLS.   A fair number, but still a small percentage of the taxable bond space, and most are decades old, they don't seem to be introducing them anymore.  In some ways seems like these should be more lucrative -- they provide cheap leverage to goose yield while still diversifying from equities  Leveraging a junk portfolio is theoretically kind of crazy,  severely skewing the risk reward profile -- vast increase in left tail blow up compared to unleveraged, while the positive right tail is still capped.   (contrast to equities).   

I know, max out the yield to sell a new fund, you can always make more if they blow up and everyone will forget the old ones.  But still, seems like there would be more of a market for it.  

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Explorer ○

Re: Why so few investment grade taxable CEFs?

It's all about supply and demand.  If there is a demand, the CEF sponsors will make more.  If you want exposure to this asset class IMHO there are better alternatives such as the ETF,  LQD, or Vanguard open-end fund VFIDX.  they have an expense ratio of .15 and .10 respectively.   It's hard for an active manager to overcome the hurdle of a 1.5% expense ratio of a closed-end fund on a security that's yielding 3% before expenses.

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Explorer ○○

Re: Why so few investment grade taxable CEFs?

Actually CEF expenses are not as high as that usually, and you also must factor in the discount.   E.g. JHS has an expenses on net assets of about 1.0%.  At a discount of 7%, the "risk-free" income due to discount is about 0.45%, resulting in an effective ER of 0.55%.   However, since low leverage costs are actually one of the benefits of CEFs, to compare with an ETF I think one should use ER on total assets -- so effectively JHS has an ER of 0.37%.   (I have excluding interest expense, because again, low cost leverage is a plus compared an ETF)

0.37%  is a little higher that an ETF index of 0.1%, but one gets active management and low cost leverage and the absolute difference of 0.25% really isn't much.  Of course the value of active management and leverage can be argued, but certainly they are considered useful to a significant segment of investors.

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Contributor ○○○

Re: Why so few investment grade taxable CEFs?

The expected return on a bond portfolio depends on its yield and expected losses due to defaults (oversimplifying). The losses due to defaults are higher for high yield bond CEFs than IG bond CEFs, but many CEF investors are yield-driven and pay less attention to expected NAV declines than to current yield. So IG bond CEFs are unappealing to many CEF investors. There may be an opportunity in IG bond CEFs for investors who properly focus on risk-adjusted total return.

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Contributor ○○

Re: Why so few investment grade taxable CEFs?


@Ninja wrote:

It's all about supply and demand.  If there is a demand, the CEF sponsors will make more.  If you want exposure to this asset class IMHO there are better alternatives such as the ETF,  LQD, or Vanguard open-end fund VFIDX.  they have an expense ratio of .15 and .10 respectively.   It's hard for an active manager to overcome the hurdle of a 1.5% expense ratio of a closed-end fund on a security that's yielding 3% before expenses.


+1

 

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