Six reasons not to own (bond) CEFs

[chang]

Re-posting for kathiel (and anyone interested). I thought there were seven, but I could only remember six. The subject line is obviously click-bait; naturally, these are only MY reasons, not anybody else's reasons.

1. Confusion. The bewildering collection of seemingly identical CEF options (managed by the same people) offered by many companies puts me off. If you take the words "Income", "Corporate", "Opportunity", "Strategic", "Municipal" and "Plus", there are 6!/(3!)^2 = 20 different ways of creating a name using three of these words.* And PIMCO is not the only company whose CEF listing breaks out into an eczema of identical-looking funds.
   
   (*That's 20 ways if you ignore the order of the words. If you consider the word order, there are 6!/3! = 120 different combinations!)
   
   
2. Leverage. I can see paying for leverage if you're 100% invested, but what sense does it make to pay for leverage (= borrow money) if you also own cash? Just put more of your cash to work and don't pay the leverage costs. Since cash (or UST bonds, my cash equivalent) is part of my AA, paying for leverage doesn't make sense.
   
   
3. Expense ratios. In my opinion, there are no free lunches in bonds, except perhaps for the rare case when a gifted manager identifies a mispriced bond and makes a good trade. On the whole, you buy bonds for their dividend. You collect the dividend and forget the NAV swings. After the bond matures, ignoring the risk of default, the holder gets back the bond's face value.
   
   So the key is to maximize the dividend and minimize the frictional costs. IMO expense ratios eat an ugly bite out of the yield. What are you really paying for? Just the convenience of have a liquid fund, and some manager competence in selecting bond categories and individual issues. Some CEFs have 1-2% ERs excluding leverage costs. Nuts IMO.
   
   The "No Free Lunch" axiom states that given two identically-performing funds with different ERs, the one with the higher ER is taking more risk.
   
   
4. Premia. The only thing I like about CEFs is when they are trading at a discount. Discounts inflate yield; premia compress it. Why on earth would I buy a CEF trading at a premium?
   
   
5. Inherent volatility. CEFs are really trading vehicles. They are subject to exaggerated swings due to various conditions and events, such as when a managed distribution is cut. I'm not a trader, so what do I need this headache for?
   
   
6. Maintenance. CEF owners need to (or should) monitor a variety of metrics to check on the health of their funds, primarily UNII. I don't want bond funds that are high maintenance.

[Fearchar]

Possibly, a 7th reason could be the lack of standard metrics for assessing many CEFs.

There are numerous accounting metrics for every individual stock as well as the products, markets, business models, conference calls and persona's available for review associated with equity.  Mutual funds and ETFs, being a managed collections, have familiar metrics.  Bonds are not as complicated, but still have a good number of metrics and classes that are widely understood.

CEF's can be simple and similar to ETFs, but then they can be very complicated and essentially opaque to all investors.

That said, while there are plenty of investors committed to holding large amounts of cash, with inflation as high as it is, over the long term cash is guaranteed to lose purchasing power.  With interest rates as low as they are, the same goes the majority of bonds.  Even junk bonds are trading at exceptionally small margins.  Cash and long term bond holders are effectively paying a tax; call it the inflation tax.

90 day treasuries (cash) is currently yielding 0.13%.
5 year TIPs are -1.30%
ICE BofAML HY spread: 3.1%
Inflation ~7%

Cash will of course at some point in time be widely appreciated, but not while the FED is stuffing the financial system with it.

[uncleharley]

"Cash will of course at some point in time be widely appreciated, but not while the FED is stuffing the financial system with it."

I just have to point out that Taper has begun and the USD continues to lose value as measured against a basket of currencies. This situation will turn around, but it can take a long time. Meanwhile many investors would do well to get over their aversion to commodities. They are no riskier than any other liquid investment. Anything that is liquid, will fluctuate in value.

[FD1000]

So, when do you want to use CEFs or any other category? When it's doing well and better than KISS investing.
I'm not against any category, but show me the money first.

I like to show actual numbers.

1) Expense ratio PDI=2.78...VOO(SP500)=0.03%...FXAIX=0.015.  This means that every year PDI has to make an additional 2.75% just to break even compared to the SP500, nuts.

2) Performance: in just 3 years(link), 100K invested in PDI produce a total return of $18.7K while FXAIX made $100.3K. How long it would take PDI to close the gap? Years.

[FD1000]

Jan 16, 2022 14:09:39 GMT steelpony10 said:

chang ,Fearchar ,

So you would rather throw your total fate into the hands of conventional high expense funds, current headlines, actual factual random events, scores of small positions, foreign investments, endless market timing and what you think? Does anyone review balance sheets, minutes of meetings, vote their ballots etc. or just wing it?

Stupidly I haven’t paid much attention to any of those posted reasons and the above sentence either and luckily stumbled into thousands of monthly deposits the last twelve years with a minimum amount of supervision on my part just solid professional management.

I think the only reason is if you received 80k a year with your 1 mil of investment assets for 12 years (960k) this amateurs expensive hobby would be over. If you can’t beat the S@P index constantly which apparently even the pros can’t your hurting yourself. Around 80k assured with the excess income deposited monthly into VTI, VV, VOO, SPY etc. low expense indexes not higher expense managed funds puts one in the ballpark at least.

So why not one low cost equity index and bond fund plus cash instead? Ignore everything else. No confusion, no debts, low expense ratios, exact market rates and volatility and no maintenance. Every other method would be flawed.

You got it. This is what Buffet said many times. It's been known already for decades that a very low wide index such as VOO,VTI will beat most other funds for longer periods of times, think decades. Please read Random walk. It was my first book I read about investing, free(link) just for you.
Again, 960K doesn't impress me, only total returns. The other factor is volatility/risk IF YOU CARE.

Fate? the biggest companies in the world is fate? Cap-weighted simple index based on market prices is fate?
Fate is 2-3 guys selecting securities based on perception of future market just to find out it can be wrong? Every time a fund manager beats the SP500 for years they write articles about him/her, just to find out years later they lag the market, think Bill Miller.

Arnott looked so smart in 2009 when he beat the SP500, after all, it was easy in 2000-2010, the SP500 lost money. Arnott claimed that his "sophisticated" models are great and why he beat it. 10 years later, PAUIX performance was a joke.

There is a good reason Vanguard is so big, one honest guy, name Bogle, showed millions how corrupt Wall Street pros are.

[FD1000]

Jan 16, 2022 14:25:56 GMT steelpony10 said:

FD1000 ,

      Sorry FD1000 I was editing as you were posting.

       I decided if I spent 40k a year plus inflation for 12 years with my personal inflation rate covered half by SS and had put the excess into equities this last 12 year period I would be impressed with the 10-12 year capital gains and my portfolio value being up about 80%. I realized that would be too wordy and “complicated” to post tried to go for KISS instead. Lol.

CEFs aren't KISS but a very low ER wide fund is.
Sometimes SP500 gets so expensive, it doesn't do well for several years, if you know when to switch you do much better but it's pretty difficult to beat it.

You are always coming back to income, and your personal sitaution while I'm talking generic, no emotions, KISS investment ideas based on simple math: total returns, risk/volatility, total returns include all performance, risk-adjusted performance and lastly, I can set up a monthly pay using VFIAX in 2 minutes and let it run for years. 

[acksurf]

CEFs add bit of spice - simple as that for some (certainly not all). I see them similar as Emerging Markets - adding spice but probably not needed. Further, CEFs are likely still a better return than Vegas or a boat.

[Fearchar]

steelpony10 ,

I currently own shares of PDI.
So, while I can see their downsides, in moderation they can be a good investment.
However, as chang has  pointed out, they do require paying attention.

We had a saying where I worked:

Stand Tall, Walk Straight and let GE do it all.
This was in reference to all the chaos and pressure that occurs during nuclear reactor refueling outages.

For the investor, the saying would be more along the lines:

Stand Tall, Sleep Well and let Mr. Market do it all.

In other words, a lot can be said for buying an index fund and not paying attention to it (sleep well).
People that do that will beat most professionals and amateurs.
What prevents people from doing that is fear.

[steelpony10]

Jan 16, 2022 16:33:10 GMT Fearchar said:

steelpony10 ,

I currently own shares of PDI.
So, while I can see their downsides, in moderation they can be a good investment.
However, as chang has  pointed out, they do require paying attention.

We had a saying where I worked:

Stand Tall, Walk Straight and let GE do it all.
This was in reference to all the chaos and pressure that occurs during nuclear reactor refueling outages.

For the investor, the saying would be more along the lines:

Stand Tall, Sleep Well and let Mr. Market do it all.

In other words, a lot can be said for buying an index fund and not paying attention to it (sleep well).
People that do that will beat most professionals and amateurs.
What prevents people from doing that is fear.

       How about the old saying “don’t be in markets if you can’t afford to lose money?”

       The best way not to lose money is apparently investing in an index. Everyone should agree on that as fact. Most people should be more scared tinkering with their own retirement savings when their knowledge of investing is limited vs. someone actually in the field. Should be a common sense fact.

        All I’m doing is parroting one investment method I worked with for 35 years while I explored all options under many market conditions over that time. Experience is my only guide. I know what I want and how to find it. 

         I learned steady equity returns can be the best but in the short term are a day to day fantasy and you don’t know the day you might need them and saving a long term steady income as far above your present needs as you can risk or sacrifice best prepares your finances for your future unknown needs. By the way that’s how you got to retirement, saving money (and maybe sacrificing) for your future unknown needs. No need to reinvent the wheel I never found another better solution.

          For whatever reason some want to tinker daily thinking now I’m better off and some may go overboard with investments like CEFs secure in the knowledge that’s as much as I’ll ever risk so I’m done. Maybe I’ll need all that savings and maybe I won’t.

           

[racqueteer]

I made a post earlier this week (moved to PIMCO CEFs) related to this difference in viewpoint.  Arguments exist in both directions on this; as holding over the long haul might have a different motivation than does trading for TR.  If consistent income is your focus, it is probable that there will be a cost levied for that convenience.  As FD notes, it is similarly likely that, over the cycle, selling AT OPPORTUNE times, will favor the etf or mutual fund approach to things.  Being forced to sell shares at IN-opportune times, might have the opposite result; or at least make the results closer.  Do you want the monthly sure thing, but pay something for it?  Or are you willing to accept a little uncertainty, however unlikely, that you're going to get caught in a situation where selling might be counterproductive; with the probable result that you have less to leave after your death?  As I said in that post, it depends on your personal needs, wants, concerns, and pov.

[kathiel]

chang, Thanks for posting this for me. I am primarily an income investor, and I am 97.5% in individual stocks.I have about 2.5% in cash, basically the excess (to my needs) dividends that accumulate in my account. I did take some profits from stocks that had appreciated so much that they constituted more than 5% of my portfolio.

So I'm watching and waiting right now for a good buy on a stock. I will continue to look at CEFs.

Thanks to all of you!

[retiredat48]

Jan 16, 2022 3:39:30 GMT chang said:

Re-posting for kathiel (and anyone interested). I thought there were seven, but I could only remember six. The subject line is obviously click-bait; naturally, these are only MY reasons, not anybody else's reasons.

R48 reply in bold...Watching Brady/Tampa Bay kill Phila in football, I have some time to reply.  Chang, in my opinion you completely miss the mark here.  I will be as brief as possible in each reply:

1. Confusion. The bewildering collection of seemingly identical CEF options (managed by the same people) offered by many companies puts me off. If you take the words "Income", "Corporate", "Opportunity", "Strategic", "Municipal" and "Plus", there are 6!/(3!)^2 = 20 different ways of creating a name using three of these words.* And PIMCO is not the only company whose CEF listing breaks out into an eczema of identical-looking funds.
   
   (*That's 20 ways if you ignore the order of the words. If you consider the word order, there are 6!/3! = 120 different combinations!
2. 
   
3. R48 reply...Completely irrelevant.  The fund name never impacts performance.  With over 10,000 mutual funds/ETFs, do you realize how many name varieties of growth...or value...or capital growth funds there are in open ended mf names.
4. 
   
5. Leverage. I can see paying for leverage if you're 100% invested, but what sense does it make to pay for leverage (= borrow money) if you also own cash? Just put more of your cash to work and don't pay the leverage costs. Since cash (or UST bonds, my cash equivalent) is part of my AA, paying for leverage doesn't make sense.
6. 
   
7. The  leverage is not a personal one; it is the fund manager leverage.  In the last ten years of ZIRP, this is how they make money...borrow short, buy long securities, pocket the difference in yield.  One can get the same dividend yield by buying only half the fund, as compared to a nonleveraged open ended bond fund.  This is what you pay fund management to do--work for their money!  BTW most stock funds have underlying companies who are internally leveraged.  Most companies have borrowed money.  Like Toyota, who recently borrowed at 0.001% interest.  They don't need to borrow...but they do.
   
   
8. Expense ratios. In my opinion, there are no free lunches in bonds, except perhaps for the rare case when a gifted manager identifies a mispriced bond and makes a good trade. On the whole, you buy bonds for their dividend. You collect the dividend and forget the NAV swings. After the bond matures, ignoring the risk of default, the holder gets back the bond's face value.
9. 
   
10. The ER of PDI is 1.1%.  For this, you get the best bond fund managers who are also doing the following:  "The Fund may invest without limit in securities of U.S. issuers and without limit in securities of foreign issuers, securities traded principally outside of the United States, and securities denominated in currencies other than the U.S. dollar. The Fund may normally invest up to 40% of its total assets in securities of issuers economically tied to emerging market countries. The Fund may also invest directly in foreign currencies, including local emerging market currencies. The Fund may normally invest up to 40% of its total assets in bank loans (including, among others, senior loans, delayed funding loans, revolving credit facilities and loan participations and assignments). The Fund may utilize various derivative strategies (both long and short positions) involving the purchase or sale of futures and forward contracts, call and put options, credit default swaps, total return swaps, basis swaps and other swap agreements and other derivative instruments for investment purposes."...Yes, that's what I want, and there is no way I can do this myself.
    
    
11. Also note...with such derivatives, PDI keeps the "duration" at 3.5 currently--great protection in a rising rate market.
12. 
    So the key is to maximize the dividend and minimize the frictional costs. IMO expense ratios eat an ugly bite out of the yield. What are you really paying for? Just the convenience of have a liquid fund, and some manager competence in selecting bond categories and individual issues. Some CEFs have 1-2% ERs excluding leverage costs. Nuts IMO.
13. 
    
14. Same comment...see bold above.  1.1% er is worth it to get the 9-10% yield.
    
    
    
15. 
    
16. Premia. The only thing I like about CEFs is when they are trading at a discount. Discounts inflate yield; premia compress it. Why on earth would I buy a CEF trading at a premium?
17. 
    
18. If a fund is returning 9% yield and you pay a one-time 1% premia in price per share, is this worth it?  For many  yes; so premia itself is not the case.  PDI and PIMCO had loaded up on mortgages at 50 cents on the dollar after  the 2009 crisis.  To be able to buy in, it was worth the premia.  Further, as mortgages are repaid at 100 cents on the dollar, PIMCO had a December special distribution every year.  Other funds not doing this.  BTW you can get PDO at a DISCOUNT currently.  PDI still slight premia, and they still own some mortgages at below par.
19. 
    
20. Inherent volatility. CEFs are really trading vehicles. They are subject to exaggerated swings due to various conditions and events, such as when a managed distribution is cut. I'm not a trader, so what do I need this headache for?
21. 
    
22. What's the issue.  The dividends never stopped.  PDI thrown out with bathwater in 2020 Covid bear market...quickly recovering though.  Further, volatility creates the opportunity to buy at a discount.  In some CEFs you can buy an identical portfolio of bonds in a oef fund run by a mgmt company, that also has the CEF same holding.  Often at a discount, thus more yield for the same buck invested.  Yes, there will come a time when such mortgages are all paid off at 100% amount. 
    
    Lastly, here is a big advantage of CEFs that you do not discuss, namely, that the fund is CLOSED.  Meaning no change in fund assets, for the manager.  CEFs are sold to other investors only...like stocks.  This means the manager does not have to touch his portfolio to pay investors who are departing.  Nor can others buy in, diluting a good situation.  Such stability really meaningful in bonds.  And managers can take longer term, illiquid, positions without the fear of redemptions.
23. 
    
24. Maintenance. CEF owners need to (or should) monitor a variety of metrics to check on the health of their funds, primarily UNII. I don't want bond funds that are high maintenance.
25. 
    
26. It is done only by those who follow their funds closely.  All bond funds have UNII.  It is just that mutual fund managers do not have to provide or discuss it.  BTW, most oef bond funds have had declining dividend payout amounts, as rates fell.  No surprise here.  Many investors own PDI without knowing what UNII even means.
    
    
27. Bottom Line.  Per M*, PDI total return saw $10,000 grow into $32,736 in last decade, a time I owned it.  Benchmark bond index grew to $12,808 per M*).  I couldn't be happier.  And I will be adding to PDO next week, or as soon as I sense a sell-off bottom exists.
    
    I also recognize this is not for everyone; but as a more experienced investor, I love the opportunity the CEFs provide.  I own very few stock fund CEFs.  Some leveraged preferred share funds; mostly fixed income CEFs.
    
    
28. R48
    
    
29. (I cant get rid of the numbers!)

[chang]

I didn’t expect this post to be so divisive. To repeat, these are strictly my opinions. I’m not alleging any kind of gospel.

I’m not inclined for lengthy debate on the subject but I will answer one comment from R48, who I think misunderstood my point about leverage. Perhaps a concrete example would help.

Suppose PXXXX is an OEF yielding 4%, and PXX is a similarly constructed CEF using 50% leverage and yielding 6%. The same income is generated by $100,000 of PXX as by $150,000 of PXXXX. If I have only $100,000 available, maybe there’s an argument for PXX. But if I also have $1,000,000 sitting in cash, then why pay the extra costs of leverage built into PXX’s expense ratio? I could lend myself the money, instead of borrowing it from someone else.

R48 I don’t think I am missing anything. I understand your POV about paying for leverage, paying higher expense ratios, enduring the occasional massacre, etc. We have different points of view. My points are valid for my approach; I don’t think I have made any fundamental errors in analysis. If I have made a genuine mistake that is wrong from any point of view, please explain.

In a nutshell, CEF proponents tend — at least it seems to me — to believe that there is a free lunch involved, as far as risk and reward are concerned. I’m suspicious of this. That’s really where most of the demarcations lie.

Edit: you may remember from the old M* days that I loaded up on Pimco, Nuveen, DWS, Pioneer, Blackrock and Invesco municipal bonds CEFs at the Whitney Bottom, when yields and discounts were robust. I don’t see similar conditions today.

[retiredat48]

Jan 17, 2022 1:46:47 GMT chang said:

I didn’t expect this post to be so divisive. To repeat, these are strictly my opinions. I’m not alleging any kind of gospel.

R48 reply...I didn't take it as divisive.

I’m not inclined for lengthy debate on the subject but I will answer one comment from R48, who I think misunderstood my point about leverage. Perhaps a concrete example would help.

Suppose PXXXX is an OEF yielding 4%, and PXX is a similarly constructed CEF using 50% leverage and yielding 6%. The same income is generated by $100,000 of PXX as by $150,000 of PXXXX. If I have only $100,000 available, maybe there’s an argument for PXX. But if I also have $1,000,000 sitting in cash, then why pay the extra costs of leverage built into PXX’s expense ratio? I could lend myself the money, instead of borrowing it from someone else.

Your point is the same as mine...exactly correct.  However, I see the benefit as meaning one can invest fewer dollars in higher risk assets, and get the same dollar dividend.  The money not invested can go somewhere else.  One can also invest in leveraged and unleveraged.  Like, I have owned PFF, preferred share funds, and a smaller allotment to HPS, leveraged preferred shares.

Further, this leverage may not always be good.  IMO we are in a once-in-a-lifetime period when interest rates are being kept artificially low--zero...for 12 years now.  So to take advantage of this, one borrows cheap, invests in higher return stuff.  When credit cards offer me $20,000 at 0% for next 12 months, at 0-2% fees, I take it!  That PIMCO can borrow at low rates and invest in higher, I say go for it.  Take advantage of situation now, for it will be over when rates are normalized.  I buy their management to do this... I can't do this myself.  

Lastly, unlike stock, there are so many more individual bonds, that I consider mis-pricing, or inefficiencies do occur.  I expect PIMCO to find such, and I think they do.  All sorts of distress stuff around.

R48 I don’t think I am missing anything. I understand your POV about paying for leverage, paying higher expense ratios, enduring the occasional massacre, etc. We have different points of view. My points are valid for my approach; I don’t think I have made any fundamental errors in analysis. If I have made a genuine mistake that is wrong from any point of view, please explain.

Covered above.  One need not buy any CEFs.  But try to understand the basis of CEF ownership here.  I could say the same for high yield junk bonds.  Most advisors said do not buy, yet I owned same for 35 years, with dividends reinvested, and great total returns.  But guess what, I own none now!!  A time and place for everything.  CEFs own much higher quality stuff, with a portfolio duration of only 3.5 years, so interest rate risk lessened...and PDI is SHORT 10% in bond holdings, so a balancing act to NAV in times of falling bond prices.  I feel much more comfortable than owning a junk bond fund.

In a nutshell, CEF proponents tend — at least it seems to me — to believe that there is a free lunch involved, as far as risk and reward are concerned. I’m suspicious of this. That’s really where most of the demarcations lie.

It's no free lunch.  It's making use of the ZIRP low rate environment, to ones advantage.  Like is refinancing a mortgage to a lower rate a free-lunch?  No, if the math computes a benefit.  It works.  I got a credit card offer recently for all purchases to Jan 2023 to be at 0% interest, no fee involved.  I am using that card now, making min monthly payments. Remember, FI CEFs underlying assets are contractual instruments, not growthy stuff like stocks which are at high risk.

Consider CEFs for a small space in a retiree portfolio, as part of yield boosting alternatives.  But if uneasy, do not.  My youngest brother just retired.  After discussing, he tucked a small holding of PDO in his portfolio.  Along with some other yield-boosters, we got to where he can live off of SS and dividends from his modest portfolio.  Not bad for starting out, right.


R48 

[retiredat48]

Jan 17, 2022 20:03:31 GMT retiredat48 said:

Jan 17, 2022 1:46:47 GMT chang said:

I didn’t expect this post to be so divisive. To repeat, these are strictly my opinions. I’m not alleging any kind of gospel.

R48 reply...I didn't take it as divisive.

I’m not inclined for lengthy debate on the subject but I will answer one comment from R48, who I think misunderstood my point about leverage. Perhaps a concrete example would help.

Suppose PXXXX is an OEF yielding 4%, and PXX is a similarly constructed CEF using 50% leverage and yielding 6%. The same income is generated by $100,000 of PXX as by $150,000 of PXXXX. If I have only $100,000 available, maybe there’s an argument for PXX. But if I also have $1,000,000 sitting in cash, then why pay the extra costs of leverage built into PXX’s expense ratio? I could lend myself the money, instead of borrowing it from someone else.

Your point is the same as mine...exactly correct.  However, I see the benefit as meaning one can invest fewer dollars in higher risk assets, and get the same dollar dividend.  The money not invested can go somewhere else.  One can also invest in leveraged and unleveraged.  Like, I have owned PFF, preferred share funds, and a smaller allotment to HPS, leveraged preferred shares.

Remember, Chang, for retiree portfolios, it's the DIVIDEND that provides the primary safety, not the volatility.  Many dividend-themed retirees have spending covered by their portfolios except for perhaps needing a one to two percent equity drawdown each year.  Quite comforting in bear markets.  With a small amount of leverage, one boosts the dividend.

Further, note this leverage may not always be good.  IMO we are in a once-in-a-lifetime period when interest rates are being kept artificially low--zero...for 12 years now.  So to take advantage of this, one borrows cheap, invests in higher return stuff.  When credit cards offer me $20,000 at 0% for next 12 months, at 0-2% fees, I take it!  That PIMCO can borrow at low rates and invest in higher, I say go for it.  Take advantage of situation now, for it will be over when rates are normalized.  I buy their management to do this... I can't do this myself.  

Lastly, unlike stock, there are so many more individual bonds, that I consider mis-pricing, or inefficiencies do occur.  I expect PIMCO to find such, and I think they do.  All sorts of distress stuff around.

R48 I don’t think I am missing anything. I understand your POV about paying for leverage, paying higher expense ratios, enduring the occasional massacre, etc. We have different points of view. My points are valid for my approach; I don’t think I have made any fundamental errors in analysis. If I have made a genuine mistake that is wrong from any point of view, please explain.

Covered above.  One need not buy any CEFs.  But try to understand the basis of CEF ownership here.  I could say the same for high yield junk bonds.  Most advisors said do not buy, yet I owned same for 35 years, with dividends reinvested, and great total returns.  But guess what, I own none now!!  A time and place for everything.  CEFs own much higher quality stuff, with a portfolio duration of only 3.5 years, so interest rate risk lessened...and PDI is SHORT 10% in bond holdings, so a balancing act to NAV in times of falling bond prices.  I feel much more comfortable than owning a junk bond fund.

In a nutshell, CEF proponents tend — at least it seems to me — to believe that there is a free lunch involved, as far as risk and reward are concerned. I’m suspicious of this. That’s really where most of the demarcations lie.

It's no free lunch.  It's making use of the ZIRP low rate environment, to ones advantage.  Like is refinancing a mortgage to a lower rate a free-lunch?  No, if the math computes a benefit.  It works.  I got a credit card offer recently for all purchases to Jan 2023 to be at 0% interest, no fee involved.  I am using that card now, making min monthly payments. Remember, FI CEFs underlying assets are contractual instruments, not growthy stuff like stocks which are at high risk.

Consider CEFs for a small space in a retiree portfolio, as part of yield boosting alternatives.  But if uneasy, do not.  My youngest brother just retired.  After discussing, he tucked a small holding of PDO in his portfolio.  Along with some other yield-boosters, we got to where he can live off of SS and dividends from his modest portfolio.  Not bad for his starting retirement, right.


R48 

[retiredat48]

Wow. I feel like a missionary who just made a convert!

Chang, you are being quite open-minded...going from your OP thread about why one should not own FI CEFs, to actually buying one. Per your post: "Bought 500 sh PDO at $19 purely as an experiment. This will be on a very short leash, and I have every expectation of losing money..Chang

Shows the value of forums.

R48

[chang]

I look at muni CEFs occasionally, since I was once reasonably seriously invested in them. Just checked PML/F/X, NEV, NMZ, MAV, MHI, VGM, KTF (and couldn’t even find MEN, an old favorite of mine). All down 7-12% YTD. I would not be a happy owner of these, and I think this performance underscores some of my points.

When discounts hit 15%, I will be leading the charge to buy.

[chang]

I just remembered the 7th reason! I knew there were 7.

Liquidity. I require sufficient liquidity to sell (or buy) a reasonable quantity at a given price at any given moment. Some CEFs offer this, but many don’t.

[chang]

Jan 20, 2022 18:25:33 GMT retiredat48 said:

Wow. I feel like a missionary who just made a convert!

Chang, you are being quite open-minded...going from your OP thread about why one should not own FI CEFs, to actually buying one. Per your post: "Bought 500 sh PDO at $19 purely as an experiment. This will be on a very short leash, and I have every expectation of losing money..Chang

Shows the value of forums.

R48

Sorry to disappoint you, and I’m not sure if you caught my post on the BSW thread, but I sold it two days later for a small loss. I did say the leash was going to be short. It subsequently dropped to $18.

[fishingrod]

Of all the funds I track and or own PDO and PDI are down the most off of their 52 week highs. PDO down 20.52% and PDI down 16.10%. The only other fund I see down worse is VWILX Intl growth at down 33.19%, which I own.
Is it time to add to these funds, maybe. I think they are compelling values at this point, but I am not up for that much volatility.

[steelpony10]

fishingrod ,

         Price swings of CEF’s could be checked ahead of time with Fund Performance, part of research. If you’re looking for cap gains they are not available. If you’re a trader these aren’t the products for that. These are professional managed glorified bond funds, cash cows.

          We first invested during the bank crisis at deep discounts selling losers, dividend Aristocrats primarily, to buy worse losers. Most were down around 20% or so on average. The whole stock market (VTI) was down about 36%. We added another 20% in March 2020 at not quite so good discounts.

          This correction as I found most are not economic events yet just selling out of fear of an unknown. Remember the China trade wars 2018? I check each prolonged market swoon and have never seen bonds go down in value more then equities.

           As buy and hold income investors we have received all our initial investment back by now and are up 700k by DCA any excess to needs income into growth equities over that time. So some luck goosed TR. This is an example that with patience, 12 years plus, risk can = great reward.

           Without looking for warts which all investments, plans and schemes have you can receive monthly installments totaling about 9k/year/100k for life now at these discounts. It’s a yes or no question. That’s all I saw. Pretty dumb huh?

[chang]

Jan 16, 2022 16:08:37 GMT acksurf said:

CEFs add bit of spice - simple as that for some (certainly not all). I see them similar as Emerging Markets - adding spice but probably not needed. Further, CEFs are likely still a better return than Vegas or a boat.

I don't disagree with your comment, but I do have an issue with the way you phrased it. It sounds like -- and many people believe -- that CEFs are an "asset class". They're not. Stock and bonds are asset classes, likewise convertibles, commodities, real estate, etc. You can buy OEFs and ETFs that hold various asset classes. Same with CEFs -- they're just a wrapper. Yet, for some reason, people sometimes treat them as if they were actually the asset class. I understand why, because of their peculiarities and nuances. Often highly leveraged, with particular distribution management schemes, DRIPs, etc. But ultimately they are a wrapper, and I think it could be unwise to forget that.

[acksurf]

Jan 31, 2022 3:02:06 GMT chang said:

Jan 16, 2022 16:08:37 GMT acksurf said:

CEFs add bit of spice - simple as that for some (certainly not all). I see them similar as Emerging Markets - adding spice but probably not needed. Further, CEFs are likely still a better return than Vegas or a boat.

I don't disagree with your comment, but I do have an issue with the way you phrased it. It sounds like -- and many people believe -- that CEFs are an "asset class". They're not. Stock and bonds are asset classes, likewise convertibles, commodities, real estate, etc. You can buy OEFs and ETFs that hold various asset classes. Same with CEFs -- they're just a wrapper. Yet, for some reason, people sometimes treat them as if they were actually the asset class. I understand why, because of their peculiarities and nuances. Often highly leveraged, with particular distribution management schemes, DRIPs, etc. But ultimately they are a wrapper, and I think it could be unwise to forget that.

Fair enough. I think many including myself are thinking of PIMCO bond CEFs (or similar). That should be clarified.

[bb2]

Aren't bond CEF's expected to drop as rates rise? One good reason not to own bond CEF's now, I'd think. Why I sold my experiment in CEF's, PCI, last year.
Is this question the same - "Would you buy TLT now?" I'm thinking if you wouldn't own TLT now, you wouldn't own bond cefs now. I'm sincerely asking because my answer is no and would be curious about a yes answer.

Did you see yogi's post over on Armchair?

groups.io/g/closedendfunds/message/770

His link to the carts he created:

stockcharts.com/h-perf/ui?s=PDI&compare=NMZ,NVG,NZF,PDO&id=p18403663961