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FGB: BDC Exposure Through A Closed-End Fund With A Strong Yield


  • A distribution cut last year created an opportunity to buy into FGB as the fund went to some deep discount levels.
  • This fund holds a basket of BDCs - these have been under pressure as they are sensitive to economic conditions.
  • FGB took a big hit last year due to this positioning, though going forward prospects are looking interesting.
  • Looking for a portfolio of ideas like this one? Members of CEF/ETF Income Laboratory get exclusive access to our model portfolio. Get started today »

Written by Nick Ackerman, co-produced by Stanford Chemist

First Trust Specialty Finance & Financial Opportunities Fund (NYSE:FGB) might not be one of the first funds anyone would think of. It is a rather small fund and holds a basket of business development companies ("BDCs") in its portfolio. This makes it a bit unique in their underlying positions, it also makes it a bit of a fund of funds approach. Though, instead of holding other traditional closed-end funds, ETFs or traditional mutual funds; they hold BDCs.

BDCs are actually a type of closed-end fund. The biggest difference to a traditional CEF is that BDCs take a more hands-on approach. They invest in private deals, typically with small to medium-sized businesses. These private deals will even go beyond just financial investments, but also can lead to management guidance too.

These are traditional investments in small to midsized businesses that can't get traditional financing through a bank. Yet, are too small for large financial institutions to back as well. Thus, BDCs provide a bit of a middle ground for these companies to turn to when they need financing. It also provides a way for a retail client to gain access to these types of private deals. Their upsides, as well as their downsides.

One thing that management noted about BDCs as a whole in their latest Annual Report, was that they were hoping institutional investors would get involved with BDCs. As it would help stabilize the market overall. I'm not sure I'm quite as optimistic as they are of this happening, though they mention it as they make remarks on the volatile nature of the securities.

The BDC industry is still evolving and its shareholder base continues to need greater participation from institutional investors. Progress is gradual, but there appears to be a growing understanding

Data by YCharts

Data by YCharts

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This article was written by

Nick Ackerman profile picture
CEF/ETF income and arbitrage strategies, 8%+ portfolio yields
Nick Ackerman is an avid student of the markets and has been investing in his own accounts for over 14 years. He is a former Financial Advisor and has previously qualified for holding Series 7 and Series 66 licenses. These licenses also specifically qualified him for the role of Registered Investment Adviser (RIA), i.e., he was registered as a fiduciary and could manage assets for a fee and give advice. Since then he has continued with his passion for investing through writing for Seeking Alpha, providing his knowledge, opinions, and insights of the investing world. His specific focus is on closed-end funds as an attractive way to achieve income as well as general financial planning strategies towards achieving one’s long term financial goals.


I provide my work regularly to CEF/ETF Income Laboratory with articles that have an exclusivity period, this is noted in such articles. CEF/ETF Income Laboratory is a Marketplace Service provided by Stanford Chemist, right here on Seeking Alpha.

Analyst’s Disclosure: I am/we are long MAIN. 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.

This article was originally published to members of the CEF/ETF Income Laboratory on February 14th, 2021. May initiate a position in FGB over the next 72 hours.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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