When is a clone better than the original? When it’s a bargain-priced copy of a bond mutual fund. Mutual funds sometimes create so-called closed-end funds that have the same manager and strategy—and very similar holdings—but lower expenses. As closed-end funds, they have a fixed number of shares and trade like a stock on an exchange. That means investors sometimes buy and sell shares at “discount” prices—lower than the value of the fund’s underlying holdings. Important: The clones may use leverage to enhance returns, which means that they might have greater risk and bigger price swings than the mutual fund.
Attractive closed-end clones…
BlackRock Corporate High Yield (HYT) was recently selling at a 10% discount because investors are worried that high-yield (junk) bonds are overvalued after several strong years. Overall volatility is not much greater than for the mutual fund version, BlackRock High Yield Bond (BHYRX).
Eaton Vance Floating-Rate Income (EFT) invests in bank loans—securities similar to junk bonds but with lower default rates and greater protection against rising interest rates. Buying this closed-end clone avoids the 2.25% front-load fee charged by the Eaton Vance Floating-Rate mutual fund (EVBLX), and the closed-end version recently traded at an 8% discount. Its use of leverage resulted in returns over the past five years nearly double those of the mutual fund.
Templeton Global Income (GIM), which invests in foreign government bonds, ranks in the top 1% of its category over the past decade and recently was trading at a 7% discount. It is a clone of Templeton Global Bond Fund (TPINX).