Higher Yields with Closed-End ETFs?

I was catching up with my magazine reading when I came across this article in the August 2005 issue of Kiplinger’s Personal Finance* – ‘Big Yields, Not-so-big Risks’. It introduced me to these closed-end loan funds, that trade like stocks, which invest in low-grade bank loans and produce dividend yields of about 6%. Let’s focus one of their examples, ING Prime Cap Trust (symbol: PPR). This fund caught my eye for obvious reasons.

It currently offers a yield of 6.60%, and is actually trading below it’s Net Asset Value. It has a really high annual expense ratio of 3.17%, but that seems to be the norm for these types of funds. What I really need to gauge is how much risk I am taking on for that appetizing extra yield.

According to the article:

Known as senior-loan funds, these products are immune from swings in long-term interest rates… The funds invest in loans that banks make to corporations, generally those with low debt ratings. In the event of bankruptcy, holders of these senior loans stand at the head of the creditors’ line… the interest rates on these loans reset periodically — typically every two months. That means the interest rates borrowers pay rise along with jumps in short-term rates.

Top holdings include loans to Charter Communications, General Growth Properties, and MGM Studios. The loans all have maturities of 5-9 years. The borrowers typically have bad credit ratings, but how bad is bad? It seems like even if they default the fund can recover a good deal of the money. Anyone more knowledgeable on this stuff have opinions?

Here are two more links I found that mention PPR – Forbes: Fixed Income for Bears and MSN MoneyCentral: 8 ways to earn 8% or more. Honest.. I’ll look into them when I wake uzzzzzzzzzzzz…..

* As a reminder, past articles of Kiplinger’s Personal Finance from the previous two months are available online for free!

Comments

  1. Alan Yeung says:

    Eliminating the high expense ratio, the net yield is around 3.5%? As interest rises, those float rate funds can sink hard. IMO, your presidential MMA is much better than this in terms of reward/risk ratio…

  2. I don’t think works like that, Alan. (Someone please correct me if I’m wrong.) I think the yield is 6.6% even with the expense ratio.

  3. Closed funds regularly trade below their NAV. Make sure you’re well informed before you pull the trigger on any of these funds.

  4. Anon – Don’t worry, not going to go nuts or anythings, but if you have have any other thoughts I’d welcome them.

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  1. [...] time horizons. Accordingly, I’ve been reading the articles I mentioned in my previous post on ING Prime Rate Trust. First let’s break this down a bit to my level of [...]

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