Skip to main content
utility-drawer__close
0
Add funds
Fund 1
Fund 2
Fund 3
Fund 4
TOOLS
The Morningstar Fund Compare tool quickly evaluates different funds against one another. In addition to Nuveen funds, add any MF, CEF or ETF available from Morningstar. Important information and disclosures are included after you click Generate Report. Please ensure to enable pop-ups in your browser.
The Morningstar Portfolio Review tool compares and analyzes your portfolio holdings. In addition to Nuveen funds, add any MF, CEF or ETF available from Morningstar. Important information and disclosures are included after you click Generate Report. Please ensure to enable pop-ups in your browser.
utility-drawer__mobile-restriction Tools are currently unavailable for use on mobile. Please visit the desktop site.
fund compare tool image
Fund Compare
Quickly evaluate different MFs, CEFs and ETFs against one another
portfolio review tool image
Portfolio Review
Generate a detailed analysis of your portfolio holdings including MFs, CEFs and ETFs
Image of Municipal bond investing ladder tool
Municipal Bond Ladder Tool
Learn how a laddered portfolio may perform in rising rate environments
Powered by Morning star
Confirm your location and role
location select
language select
Closed-end funds

How closed-end funds use leverage to enhance returns

Learning about leverage

Investors seeking higher yields often diversify their holdings beyond the traditional bond market, looking for alternative ways to generate the high, steady income flow they want and need. And the more they look for income, the more often they may encounter the word “leverage” — especially in the context of certain closed-end funds (CEFs).

For some investors, the word leverage is a red flag, signaling an investment they believe is too complicated to understand. But it shouldn’t be. Leverage is simply borrowing, and it’s a familiar part of everyday life. If people didn’t use leverage, most wouldn’t be able to buy a house or a car, or finance their education with student loans.

Most closed-end funds are designed with a goal of providing attractive, income (in the form of regular monthly or quarterly distributions), and their portfolio managers have a number of tools at their disposal to assist them in accomplishing that goal. Leverage is simply one of those tools; many but not all closed-end funds use it.

To create leverage, a CEF raises capital by borrowing at short-term rates, then uses the proceeds to make additional investments for its portfolio. The fund may also leverage itself by issuing senior securities (preferred shares of the fund) that pay variable or fixed dividends at short-term rates. Holding certain investments within the portfolio — portfolio leverage — is another leverage strategy. The primary costs associated with leverage are ongoing dividend and interest expenses, but there may also be expenses for issuing or administering leverage. A fund’s leverage strategy is successful when, after considering the associated costs, shareholders obtain higher distributions or total return than they would have without leverage. 

Leverage works best when the yield curve is steep — in other words, when short-term rates are lower than long-term rates. The fund can borrow at lower short-term rates and buy longer-term securities that offer higher returns.

 
Short-term and long-term rates chart 

If the fund is doing well, leverage will typically deliver higher returns and income than the same strategy without leverage. However, this mechanism works in both directions. If the fund’s underlying return is negative, leverage will deepen the losses compared to the same strategy that doesn't use leverage. As a result, you can expect higher highs and lower lows from a leveraged fund, both in terms of income or return and share price volatility.

Time, however, is also important — over longer periods, leverage has historically delivered incremental income that more than compensated for the associated cost and added volatility. This makes leveraged closed-end funds worth a closer look, especially for yield-seeking investors looking to complement and diversify an existing portfolio. To learn more about the features and mechanics of leveraged closed-end funds, see Understanding leverage in closed-end funds.

Related articles
Closed-end funds Understanding leverage in closed-end funds
Most closed-end funds use leverage in an effort to enhance the fund’s return, income or both.
Closed-end funds Close the Income Gap® with Nuveen closed-end funds
A trusted closed-end fund provider for more than thirty years, Nuveen offers advisors and investors dedicated client service with a legacy of integrity and innovation.
Closed-end funds How do CEFs compare to other investment vehicles?

Risks and disclosures

It is important to consider the objectives, risks, charges and expenses of any fund before investing. Investing in closed-end funds involves risk; principal loss is possible. There is no guarantee a fund’s investment objective will be achieved. Closed-end fund shares may frequently trade at a discount or premium to their net asset value (NAV).

Closed-end fund historical distribution sources include net investment income, realized gains, and return of capital. Leverage increases return volatility and magnifies a fund’s potential return whether that return is positive or negative. There is no guarantee a fund’s leveraging strategy will be successful. All investments carry a certain degree of risk and there is no assurance that an investment will provide positive performance over any period of time.

Nuveen Securities, LLC., member FINRA and SIPC.

Aerial view of the ocean shore

You are on the site for: Financial Professionals and Individual Investors. You can switch to the site for: Institutional Investors or Global Investors

You are about to access our website for visitors outside of the United States.

You are about to access our website for Nuveen Global Cities REIT

You are leaving the Nuveen website.

You are leaving the Nuveen website and going to the website of the MI 529 Advisor Plan, distributed by Nuveen Securities, LLC.

The Nuveen website for institutional investors is available for you.

You are about to access our website for visitors outside of the United States.

You are about to access our website for Nuveen Churchill Private Capital Income Fund (“NC - PCAP”)

Contact us
Contact us
Back to Top