Wow! 15% to 20%?!?!? How much risk is involved in those securities???
That depends. What do you mean by "risk"?
The dividends of the two notes (BDCL and CEFL) are super high because
1- the stocks in the baskets (closed end funds, or BDCs) are generally leveraged. BDCs leverage at about 80%, not sure what closed end funds use for leverage, but perhaps similar.
So a BDC, for example, has a bunch of junk loans yielding 10% or so, then leverages that 80% to get the income yield up to 18%, then pays interest and fees and whatnot to get the BDC's yield down to 8%-12%.
2- the notes are then leveraged 2x.
So if you've got the basket yielding 9% on average, you leverage that 2x and you've got a note yield up to 18%.
How much "risk" is in that? I don't know, as I said, it depends on what you mean by risk.
For CEFL I don't even know what closed end funds make up the note. I've read the list previously, and it seems to be a fairly diverse set of funds. I think the basic idea is if the global economy does well, those funds will do well, and the global economy does poorly, so with the closed end funds that make up the index. Beyond that, I don't really know. I like the fact that 30 different funds make up the note,
What would cause a loss of capital and what would result in capital gains?
You would get a loss or gain if you sold CEFL or BDCL. I have just held them for a few years, and they just spit out cash. If BDCs in general or closed end funds in general have a big move (up or down) the notes should (in theory) move about 2x up or down, which can be painful, but if you don't plan to sell, then you just take my approach which is .... hold on and pray. |
