FFA: A Closed-End Fund That's Not Too Defensive

Now that money market rates are so low, there is a penalty is being "too" defensive. Cash rates are simply too low to keep up with inflation.

One area that looks attractive now is the closed-end funds that write covered calls and sell at an above average discount to NAV. I own the First Trust Enhanced Equity Income Fund (FFA).

FFA invests in a portfolio of US large caps, or US$ ADRs of foreign issuers, and writes covered calls against part of the portfolio. The portfolio has a value tilt:

The fund has an expense ratio of 1.21%, but today's closing discount to NAV is 12.57%, so the discount/expense ratio is more than 10 times, which is fairly attractive. Over the last year, the discount to NAV has varied from zero to 13.5%, so it is near the upper end of the range. I also like the fact that the annual distribution rate is 11% which helps to recover some of the discount with each distribution.

Disclosure: Author is long shares of FFA.

Comments

[HowieDad:]

if you are looking at FFA, also consider the other closed end call writing funds: IGD, LCM, NAI. All pay about high yields- from 10.3 to 11.2%. IGD has been more consistently positive in market price.

2008 Apr 10 10:41 AM

[Rhunzzz:]

I've always wondered about these "managed distribution" closed-end funds. They may give an irresistible yield and discount, but ultimately how sustainable are the payouts? And when most of them that I have seen trade at perennial discounts to NAV, one wonders - why continue to invest in something which causes your principal to shrink over time?

2008 Apr 10 10:14 PM