What is leverage and how is it used?
All Closed-End ETFs issue common shares. Many funds also attempt to generate a higher level of income for their common shareholders through leverage. One method to implement leverage is for a fund to issue preferred stock that is designed to pay lower short-term rates to investors seeking short-term liquidity. The proceeds are used to buy generally longer-term investments. Common shareholders can earn extra income from the difference between the rates earned on the fund’s long-term bond portfolio and the short-term rates paid to preferred shareholders. Because of leverage, the net asset value per common share will be more volatile than those of comparable unleveraged funds, since the increases or decreases in the total portfolio value are all attributed to the common shares.
