Municipal Bond Forum
Avoid Risky Closed-End Funds
Q
I’ve been eyeing closed-end ETFs like Nuveen’s NKR, where tax-free yields are around 7%. I’ve made only a token investment there so far, but I’m thinking of investing more in similar funds. Your article on closed-end funds gave me second thoughts. How much do you think an investor should risk in leveraged bond funds?
A
James A. Klotz responds:
We don’t believe that investments should be made with borrowed money (leverage), whether in a closed-end fund or margin account. The current financial crisis that has changed the face of Wall Street forever was brought about, for the most part, by the excessive use of leverage.
We are always concerned when “financial engineering” creates a product which promises greater returns than the underlying instrument produces.
We recommend buying a high-quality bond with a fixed maturity date yielding approximately 6.50% rather than an artificially produced 7.00%. On $100,000.00, the difference in income is only $500.00 per year. Considering that we have all now seen how leverage performs on the downside, this sacrifice is hardly significant.
Start here.
Do you have specific criteria for bonds you’re looking for? Let us know and we’ll e-mail you bonds that fit your needs. There is no charge for this service.
The responses provided in this forum are meant to address specific questions posed by investors about their municipal bonds and to provide market insight for our general audience. Please note, your investments, objectives, results and experience may differ significantly. Our answers and any potential strategies discussed should not be construed as a solicitation to buy nor sell any security or investment product. All investing entails risk.