There’s a unique type of bond fund that picks a date in the future…sells all its bonds by that date…then liquidates the fund. After liquidating, the fund, called a term trust, distributes the assets to the shareholders. By using this strategy, term trusts are more likely to reflect the full value of the bonds they hold for investors who hold their fund shares until the liquidation. The strategy helps offset a common hazard of bond funds—prices tend to drop when interest rates rise.
Term trusts, which are “closed-end” funds that trade on exchanges like stocks, are especially attractive now because many are trading at discounts of as much as 10% to the underlying value of the bonds they hold. That’s because investors generally are shying away from bond funds in anticipation of rising interest rates. But if you hold your term trust investment to the fund’s maturity date, you will receive your share of the total value of the underlying holdings regardless of what the share price of the fund is at that time. Caution: If the issuer of any of the bonds defaults, that would reduce the underlying value of the fund and cut into what you get back at maturity. The following are attractive term trusts…
BlackRock Defined Opportunity Credit Trust (BHL) invests in short-term, adjustable-rate loans known as floating-rate loans. Recent yield: 4.6%. Recent discount: 3.4%. Liquidation: 2017.
Blackstone/GSO Senior Floating Rate Term Fund (BSL) also holds floating-rate loans. Yield: 6.7%. Discount: 6%. Liquidation: 2020.
Nuveen Intermediate Duration Quality Municipal Term Fund (NIQ) invests in high-quality municipal bonds. Yield: 4.5%. Discount: 8.5%. Liquidation: 2023.