Should You Buy Highest-Yielding CEFs? Don't Try This At Home

In the comments of one of our recently published articles, we got into an interesting discussion about the value of investing in very high-yielding closed-end funds. Our intuition is that many of these funds have poor distribution coverage and high premiums, so our attitude has always been "buyer beware". However, we got some pushback to this view, so we decided to investigate further.
Because many such rules-focused investing discussions tend to devolve into repeated bouts of anecdotal evidence, we thought we would attempt a systematic analysis of the issue. So, in this article, we take a look at an investment strategy of holding the highest-yielding funds.
Our conclusion is that while the strategy has posted strong absolute returns for much of its history, these returns are inherently unsustainable due to significant volatility of the strategy and very large and repeated drawdowns.
All-In High Yield
In order to backtest the strategy of holding the highest-yielding CEFs, we create a new factor within our systematic strategy framework. This investment framework assigns a score to all funds in our coverage according to a particular rule (in this case, highest TTM yield) and allocates to the highest-scoring 10% funds with monthly rebalancing. We do not take into account trading costs, commissions or tax implications of strategy rebalancing in this analysis.
What are the highest-yielding funds currently? The chart below shows these funds sorted by TTM yield. Just a... Read more