Recognizing Leverage In The CEF-PGF Comparison

| About: PowerShares Financial (PGF)

Reader JonD correctly pointed out in comments on my earlier post that I had ignored the aspect of leverage when I compared PGF's yield, which is not leveraged, to that of a CEF which is leveraged to right about a third of its asset base.

While I accept this criticism as a matter of principle - it is unfair to compare leveraged and unleveraged funds, the latter fighting with one proverbial hand tied behind their backs - I don't think this is a huge factor in this case. The recent Bill Gross comment shows that leverage (especially as little as 35%) doesn't get you that much extra juice these days.

Specifically, The BPP uses its own preferred shares for leverage, on which it pays just over 4.5% (according to their last report). Assuming they take that and invest it in something that yields even as much as 8% (surely an over-estimate), that would still only account for about 1.1% of yield. Subtracting that, BPP - which trades at a premium and has a larger fee, mind you - still beats PGF by a few dozen basis points.

One might also argue that the extra risk taken by the CEF's in leveraging is comparable to the extra risk taken by PGF in concentrating on a limited number of issues.

Thanks to JonD for pointing out this fundamental flaw in my previous analysis. Now we have a more complete picture.