Don’t Reach for Yield.

Don’t Reach for Yield.
Investors ask Natalie About Closed-End Funds.
 
Dear Natalie. I’m retired and I need to earn income on my investments. The stock newsletters that I subscribe to are promoting closed-end funds. I must admit the yield on BST, the Blackrock Science and Technology Trust (closed-end fund) looks amazing, at 8.75%! What do you think?
Signed: Looking for more than 5%
 
Dear Never Reach for Yield 😉:
Closed-end funds offer a high yield. However, the yield is deceptive, because many people are not subtracting the fees… or factoring in the losses. Managed funds, like closed-end funds typically charge above 1%, which reduces the yield you are actually earning. However, that’s not the only way that you might be getting less money from closed-end funds then advertised. See below for some realities that many investors have sadly experienced firsthand in their cash-bleed wallets.
 
 
Here are some of the Risks
 
Loss of Principal
Payout Cuts
Thinly Traded. Illiquid
Leverage Increases Risk & Losses
Don’t Reach for Yield
The Guggenheim Strategic Opportunities Fund (symbol: GOF)
 
And here is more information on each one of those line items
 
Loss of Principal
The Blackrock Science and Technology closed-end fund, symbol BST, has lost almost half of its value over the past four years.

Performance of BST over the last 5-years. (c) Microsoft. Used with permission. MSN.com.

The fund invests in a lot of the Magnificent 7. It boasts of yielding 8.68%. Subtract the fees of 1.11% and you’ve got a yield of 7.57% -- still not bad, especially since the fund value increased by 9.15% last year. However, if you purchased the fund in 2021, you’re still pretty far underwater, however. Meanwhile, the Magnificent 7 companies doubled in 2023, and even the more broad-based S&P500 scored 26% total return.
​

Performance of BST (blue) compared to TECB (purple) over the last 5-years. (c) Microsoft. Used with permission. MSN.com.

Many of these mega, multi-national Magnificent 7 companies are trading at elevated price-earnings ratios. So, if BST increased only 9.15% in value when the companies were on fire, imagine how poorly it might perform if the share prices decline to more normal valuations.
 
Payout Cuts
Many closed-end funds promise aggressive yields to attract investors. However, if they are not able to make that money in income or capital gains, they have to sell assets in order to pay the dividend. Reducing their asset base means that they may have to cut the payout. That happened to a lot of CEFs in early 2023 after the bond and stock losses of 2022.
 
Thinly Traded. Illiquid.
Many closed-end funds tend to be very thinly traded – worse when they fall out of favor. Microsoft has a daily volume of 25 million. BST’s daily volume is just 118,000. If they have to cut their pay-out, even fewer people will be interested in buying the asset off of you, which means more losses when/if you sell.
 
Leverage Increases Risk & Losses
Most closed-end funds are highly leveraged. Leverage can work in our favor when the wind is at our back. However, as happened in 2022, when asset values tumble, the leverage causes them to plunge further, faster. With over half of the S&P500 at or near junk bond status, there is a lot of debt and leverage in the U.S. The higher the dividend, the higher the risk.
​
Don’t Reach for Yield
It’s better to receive a 4-5% interest rate and not lose money on the investment than it is to be told that you are earning a 5-7% (or higher) interest rate and lose principal. One of my coaching clients was told that his financial team had given him a wealth plan that was earning 5-7% annually and was protecting him from the losses in stocks. Both of those statements were untrue – and the truth was easily found on the actual brokerage statement! You might have heard that the S&P500 just hit an all-time high last Friday. Once the losses in his bonds and fees were factored in, his portfolio performance was just 1.8%. As you can see in the charts below, stocks were the best performer in 2023 by far with 26.3% total gains in the S&P 500.

Stocks were the best performers over the last 10 and 30 years, as well.

The Guggenheim Strategic Opportunities Fund (symbol: GOF)
The Guggenheim Strategic Opportunities Fund is another closed-end fund that has lost a great deal of money over the past five years. If you’re just looking at the yield of 16.72%, you might get very excited. Here again, after factoring in expenses of 2.88% and 1-year losses of -19.40%, the picture becomes far less appealing. This fund is invested in long-term bonds, which were the worst performing assets of 2022, and were responsible for the bank failures of 2023.

​

Performance of GOF over the last 5-years. (c) Microsoft. Used with permission. MSN.com.

Long-term bonds are not easy to get rid of, as you can see in the liquidity chart below. So, this fund will likely continue to struggle.
 ​

Bottom Line
There are two sayings that come to mind. One is, “Never reach for yield.” The other was made famous by Will Rogers. He said, “I’m more concerned with the return of my money than the return on my money.” Many closed-end funds may look like they have a tasty yield. However, when you dig beneath the flashy bait, it’s not nearly as appetizing.
 
If you’re willing to accept the above risks for reasons that only your extreme due diligence will reveal on the specific fund you’re interested in (not just thinking that you’re buying on a discount to “nav”), then it should be considered as a hot slice where you are taking on much higher risk in hopes of a higher gain. (As the case with BST, why not just have a hot slice of Magnificent 7 instead?) However, in general in today’s Debt World, closed-end funds are potentially illiquid, negative-yielding, risky offerings to avoid.
 
 
​

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Natalie Wynne Pace is an Advocate for Sustainability, Financial Literacy & Women's Empowerment. Natalie is the bestselling author of The Power of 8 Billion: It's Up to Us and is the co-creator of the Earth Gratitude Project. She has been ranked as a No. 1 stock picker, above over 835 A-list pundits, by an independent tracking agency (TipsTraders). Her book The ABCs of Money remained at or near the #1 Investing Basics e-book on Amazon for over 3 years (in its vertical), with over 120,000 downloads and a mean 5-star ranking. The 5th edition of The ABCs of Money and the 2nd edition of Put Your Money Where Your Heart Is were released in 2021. Follow her on Instagram. 
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Important Disclaimers
Please note: Natalie Pace does not act or operate like a broker. She reports on financial news, and is one of the most trusted sources of financial literacy, education and forensic analysis in the world. Natalie Pace educates and informs individual investors to give investors a competitive edge in their personal decision-making. Any publicly traded companies or funds mentioned by Natalie Pace are not intended to be buy or sell recommendations.

ALWAYS do your research and consult an experienced, reputable financial professional before buying or selling any security, and consider your long-term goals and strategies. Investors should NOT be all in on any asset class or individual stocks. Your retirement plan should reflect a diversified strategy, which has been designed with the assistance of a financial professional who is familiar with your goals, risk tolerance, tax needs and more. The "trading" portion of your portfolio should be a very small part of your investment strategy, and the amount of money you invest into individual companies should never be greater than your experience, wisdom, knowledge and patience.  

Information has been obtained from sources believed to be reliable. However, NataliePace.com does not warrant its completeness or accuracy. Opinions constitute our judgment as of the date of this publication and are subject to change without notice. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors.