Which Are Better: Open- or Closed-End High-Yield Funds?

This week's topic: high-yield closed-end funds. Reader Peter Trefonas wonders how they compare with open-end high-yield funds, and Peter Cleaver, shut out of U.S. open-end funds because he's Canadian, is looking for specific recommendations in the high-yield closed-end arena.

In answer to Peter T.'s question, closed-end funds of all types have the potential to outperform their open-end counterparts for at least two reasons. Because closed-end funds don't need to keep cash on hand to meet redemptions, they can stay fully invested at all times. Also, closed-end fund expense ratios are generally lower, and all fund performance figures are net of expenses.

In addition, many closed-end funds have the ability to use leverage. They borrow money at short-term interest rates and invest it at long-term rates, and the shareholders get the difference. As long as short-term rates don't spike, leverage should goose a fund's yield and return. ...