You may be looking over the jaw-dropping discounts and dividend yields for closed-end funds and be tempted to jump in with both feet.
According to the Wall Street Journal, who quotes Morgan Stanley Research, the weighted average discount for the 650 U.S.-listed closed-end funds has widened from 6.2% to 15.6%.
In the past, when discounts widened on closed-end funds, it was a buying opportunity. The logic was that eventually the discount would narrow again and in the mean time, since most closed-end funds pay dividends, you would be paid to wait.
This time it is different. Investors are jumping ship from closed-end funds because most of them, 72% to be exact, are levered with debt. With the current credit crunch, fund managers will have a harder time rolling over their short-term debt and may have to resort to more expense financing or even liquidate of assets.
Exchange traded funds, ETFs, are a better investing vehicle. They don’t carry the same heavy management fees and sales loads that funds charge and they rarely trade far from NAV. ETFs are available for almost every asset class and investing strategy including diversifid dividend and income.
For example, the $8 billion Barclays Capital 1-3 Year Treasury Bond Fund (SHY) invests in short term U.S. treasuries and carries an expense ratio of 0.15%.
For a more complete discussion and listing of ETFs, see Investing for Income with ETFs.