The federal reserve talking heads are out and the message is clear -- interest rates are going up and the market is reacting. The two year note jumped to recent highs (see below)
Many investors have been pushing the maturity of their fixed income investments outwards in a search for yield. Now is the time to find and reallocate to shorter duration fixed income paper to weather the rising rate storm.
One very attractive option is limited duration closed-end funds. Using the screening tool on CEF Connect we located five CEFs with short durations trading at a discount to their NAV. Wells Fargo (NYSE:WFC) Adv (NYSEMKT:ERC), Blackrock (NYSE:BLK) Limited Duration (NYSE:BLW), Eaton Vance Short Duration (NYSE:EVG), Franklin Templeton Limited Duration (NASDAQ:FTD), and Eaton Vance Limited Duration Income (NYSEMKT:EVV)
CEFs are an attractive short duration option for a few reasons.
- CEFs can enhance their returns (yield) using leverage. For the five funds mentioned above leverage ranges from 19.26% to 35.48% of the Net Asset Value (NAV)
- CEFs frequently trade at a discount to their NAV meaning the distribution yield ion the share price is even higher than the yield on the NAV. Discounts range form 6.28% to 11.35% for the five funds mentioned above.
Our favorite pick among the group for short duration is BLW. BLW has a duration of just 1.26 years meaning rising rates will not significantly impact the portfolio. BLW also trades at a narrow discount to NAV and is on the lower end of distribution yield at 7.02%. In a nutshell there is a premium versus the other funds to be paid for the shorter duration.
Eaton Vance's (NYSE:EV) EVV is another good option with a longer duration of 3.26 duration it offers a very compelling yield at 7.95% but with a high degree of leverage. It also has a negative undistributed net investment income suggesting a distribution cut may be more likely.
Limited Duration CEFs are a great option for investors to ride out the rising rate tide. The funds have lower sensitivity to rising rates with the benefit of leverage and share price discounts to enhance yield for investors.
|Fund Name||Wells Fargo Adv Multi-Sec Inc||BlackRock Limited Duration Inc||EV Short Duration Diversified||Franklin Templeton Ltd Dur In||EV Limited Duration Income|
|Earnings Per Share||$0.10||$0.11||$0.07||$0.06||$0.10|
|UNII Per Share||($0.09)||$0.10||($0.02)||($0.08)||($0.12)|
|Baseline Expense Ratio||1.17%||0.92%||1.58%||1.12%||1.16%|
|Average Duration||4.95 yrs||1.52||3.06 yrs||4.00 yrs||3.26 yrs|
Disclosure: I am long EVV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.