Advantages of Tax-Free CEFs Yielding Over 5%

With so much uncertainty in the stock market, and with the possibility of tax increases on the horizon, investors have been allocating funds into tax-free bonds (municipal bonds), directly and through tax-free income closed-end funds. Tax-free closed-end funds, or CEFs, have several advantages over investing in municipal bonds directly.

Many of these CEFs have yields of 5% or more, such as the Blackrock Apex Municipal Fund (APX), which sells at a discount to net asset value, uses almost no leverage and yields 5.7%. The Nuveen New York Dividend Advantage Municipal Fund 2 (NXK) has a yield of 5.5%, is currently trading at a discount to NAV and has about 26.5% leverage, much lower than the average leverage of 34.7% for all the CEFs. The Nuveen Investment Quality Municipal Fund (NQM) yields 6.3%, utilizes about 29% leverage and trades at a slight discount.

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