CEF general discussion

[Closet_Gamer]

Very interesting thread. This is something I know nothing about … and now I’m sure I know even less than I thought.

To my eye, there are only three ways for a basket of securities to yield more than the sum of the yield on the underlying securities:

1 - paying below market price

2 - leverage where the interest rate is lower than the yield/interest on the underlying securities.

3 - ROC (which isn’t yield)

Re #1, what an odd security. Something that persistently sell for less than it’s worth even though it’s true worth is totally transparent? Could one not build a simple bot to capture this value? How has the market not crushed out this inefficiency?

Re #2, stocks that yield enough to clear the interest hurdle of the loan have to be high yield stocks. High yield stocks are usually high yield for a reason. Levering against PFE or VZ, which smart people can argue are undervalued, is a viable strategy but carries both business/dividend sustainment risks and some form of margin call risk. I guess if you buy a big enough basket it might be OK. But that was basically the thinking behind a mortgage backed securities and CDOs …

Re #3 … again, that’s not yield.

Puzzling to me.
Keep going! Interesting stuff.

 

[Koolau]

Yeah, basically lost me at "leverage." Otherwise, an interesting concept. I'm sure there are some excellent CEFs. Think I'll stick to more traditional equity plays.

 

[hotwired]

I disagree that they are a short term buy and hold. I guess it depends on your strategy, but if you are retired and using most of that income then buying and selling can disrupt your cash flow. Having said that I do monitor the situation and have moved in and out of some funds. I totally agree try to buy at a historic discount. I retired on income from CEF's and dividend stocks and interest from bonds. I also reinvest a portion of that income monthly, so that my cash flow is growing, albeit slowly, but still growing.
Lots of good resources out there like the book mentioned above and cefconnect among others. It's funny I was just looking at ADX and it's inception date is 10/1/1929 and at present has no leverage.

I suppose I'm the accumulation phase of life, a case could be made for only ADDING when discount to historic average discount is attractive (i.e

 

[hotwired]

I suppose one could also make the argument that it would be a reasonable risk as long as you compartmentalized it. In other words maybe your HSA, or a $50,000 brokerage account just for cefs. There are actually a couple of actively managed either ETS or cefs that do just what we've been talking about. There's at least two that I know of. They buy what they consider to be the best risk adjusted cefs available and rotate accordingly. I would be much more apt to try one of these on for size. Yes there's another way of fees, but this may be one of the only areas besides private real estate where somebody can suss out a little bit of alpha with a little work.

 

[surprising]

I have portion of my roth 401k invested in CEFs. It is a small portion of overall 401k. They pay over $3K/month today which get reinvested automatically. In 9 years when I am 59.5, that alone should be paying over $6K/month tax free. I kinda consider it my bond allocation since most of the CEFs are bond CEFs. Every once in awhile I'll rebalance to increase overall yield (sell funds that have gained a lot and buy funds with higher current yield).

I also own bond CEFs in my after tax brokerage account that pay for my basic living expenses in retirement now.

 

[DuluthGA]

Steven Bavaria - Anyone read his book The Income Factory or used his Seeking Alpha paid service? From the podcast I read he likes CEF’s and has strategies for investing with some diversification.

 

[Flyfish1]

I have been retired for eight years and have invested in closed end funds for over eight years to provide steady monthly cash flow . This is how I pay my expenses and the income is predicatble and reliable no matter what the market value is. The best source I found to get a basic understanding is to read the book by Steve Selengut Retirement Money Secrets A Financial Insider's Guide to Income Independence. His motto is market value fuels the ego, income fuels the yacht. Cefconnect.com is a free source provided by nuveen. Steve has his own facegroup group which is helpful to learn more. Hope this helps.

Thanks for the book recommendation.

 

[Montecfo]

An ETF is an open end fund which issues and redeems shares. That is, shares numbers vary. Number of shares vary with supply and demand. The market prices ETFs at NAV or very near it. ETFs are actively traded.

CEFs are closed. Share numbers do not change unless you get buy back shares. Price per share varies with supply and demand. The market price is not directly tied to NAV. CEFs are often less liquid.

CEFs often use leverage, but not always.

A key strategy is to buy a CEF which holds attractive assets when the discount is historically high. Then you get 2 levels of appreciation: NAV growth and narrowing of discount.

Examples: Muni bonds, REIT or real estate funds, or preferred stock funds earlier this year. Floating rate bonds at start of Fed hiking cycle. Anything that is out of favor at market in inflection points.

Sell when they reach low discount, go to premium or market reaches a new inflection point.

Bond CEFs defeat several of the weaknesses of open end bond funds and ETFs, though they also can introduce new ones.