What are special security type ETFs and CEFs?
Introduction
Throughout stoxray.com, we have coined the term "special security types" to reference exchange traded funds ("ETFs") and closed-end funds ("CEFs") that invest in security types that have certain special attributes that investors need to be aware of. Specifically, we group together ETFs and CEFs that invest in the following:
- business development companies, or "BDCs"
- master limited partnerships, or "MLPs"
- preferred stock
- closed end funds, or "CEFs"
- convertible bonds
We thought it made sense to group these ETFs and CEFs together because these special security types are usually excluded from most bond or stock market indexes. So when building a portfolio, an investor has to decide whether to include one or more of these special security types, in addition to stocks and bonds.
Another thing that makes these special security types unique is that they typically have high dividend yields, for reasons explained in detail below. But because of their special structures, special security types may not appreciate in value over time in the same way as stocks, as they tend to behave somewhat like a stock and somewhat like a bond. So it takes a little more research to understand a special security type ETF or CEF.
You can read more detail about each special security type in these articles:
A convertible bond is a bond issued by a corporation that, unlike a regular bond, gives the bondholder the option to trade in the bond for shares in the company that issued it. This gives the bondholder both a fixed-income investment with coupon payments as well as the potential to benefit from an increase in the company's share price. The additional value of the conversion option, however, will mean that the coupon payment on the bond will be lower than that of an equivalent bond with no conversion option.
Conclusion
These special security types are specialized vehicles that appeal to a smaller number of investors and traders. Because they are more difficult to understand and research, most investors probably don't need to include a special security type ETF or CEF in their portfolio. The great thing about ETFs and CEFs is that they offer investors a wide variety of choices, including ETFs that invest in special security types.