Why do closed-end funds use leverage?

Most closed-end funds use leverage in an effort to enhance the fund’s return, income or both. On the following pages we provide an overview of how leverage works, strategies used to create leverage and their inherent costs, as well as the potential benefits and risks that leverage entails. Why are closed-end funds well-suited for leverage?

What is leverage in closed-end funds (CEFs)?

Leverage is a strategy that can be employed by closed-end funds (“CEFs”) in an effort to potentially increase income and enhance returns. The use of leverage is subject to risks, including the potential for higher net asset value (“NAV”) and market price volatility and fluctuations of distributions.

How do closed-end funds work?

Here we'll take a look at how closed-end funds work, and whether they could work for you. Closed-end funds operate more like ETFs, in that they trade throughout the day on a stock exchange. Closed-end funds have the ability to use leverage, which can lead to greater risk but also greater rewards.