Equity CEFs: Demystifying Return Of Capital Distributions By Eaton Vance

Oct. 29, 2012 2:55 PM ETETB, MYI, PML, VMO, MS, BXMX, NVG18 Comments

I doubt if many investors would have noticed a white paper report that was recently put up on the Eaton Vance (EV) website in early October but since it is public information, I thought I would reprint it here and hopefully, spread the word a bit.

I cannot think of a more contentious subject for income investors than that surrounding Return of Capital (ROC) in the distributions of high yielding Closed-End funds (CEFs). Though not nearly as recognized as say the tax-free status of municipal bond interest payments, most investors would be surprised to learn that ROC can offer much of the same tax benefits. Certainly, there is nothing mystifying about municipal bonds and municipal bond funds to investors. They offer tax-free or mostly tax-free interest payments and are regarded as some of the most conservative investments available. This has made municipal bonds and municipal bond funds wildly popular and has pushed their prices in a near zero interest rate environment to all-time highs. In fact, all you have to do is take a look at the premiums that investors are paying for municipal bond Closed-End funds (CEFs) to see this. Though most muni bond CEFs use leverage of between 30% to 40% to leverage up their portfolios of muni bonds, this added risk has not deterred investors from bidding up virtually all muni bond CEFs to premium market prices over their Net Asset Values, some as high as 20% premiums.

Now I'm not going to sit here and pass judgment on the current valuation of the municipal bond market, however, owning municipal bonds vs. owning municipal bond funds are very different. Unlike individually insured AAA-rated municipal bonds which are guaranteed, municipal bond funds are not. Muni bond funds (mutual funds, ETFs or CEFs) are perpetual (i.e. don't mature) and can lose value and can change

This article was written by

Douglas Albo profile picture
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Looking for equity CEFs with the best income and appreciation potential.

Registered Investment Advisor since 2009. Prior experience includes 12-years as a Vice-President, Financial Advisor at Smith Barney from 1994 to 2001 and Morgan Stanley from 2001 to 2007.

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