BKN: A Good Way for a Closed-End Fund to Reach Monis (NYSE:BKN)

I don’t know about you, but I hate taxes. And if you’re in the minority like me in this regard, it’s worth considering which municipal liabilities are exempt from federal income taxes. the problem? There are so many to choose from. so why Isn’t it just about getting exposure through a closed box? Well – you can through the BlackRock Investment Quality Municipal Trust (New York Stock Exchange: BKN), which has been trading since 1993. It is an income fund specializing in tax-free income and capital preservation.

The structure of a closed-end fund differs from an ETF in that it is a predetermined amount of shares that are issued to the public, which are then traded on secondary exchanges. BKN attempts to invest at least 80% of its holdings in municipal bonds that are exempt from federal income taxes, but – as with most municipal bond funds – A portion of the interest may be subject to the federal alternative minimum tax (AMT).

Look at the holding

No position makes up more than 3.36% of the fund, and the top holdings are a prime example of my previous point about the world of mini-bonds. I don’t even know where to start if I want to access individual securities like this, and I don’t even know how to do due diligence on issuers.

Regarding state allocations, Texas is the largest, followed by New York and Florida. Texas clearly has a strong financial position in the state, while New York does not.

Importantly, credit quality appears generally strong, with approximately 75% rated A or higher. The 10.1% allocation to unrated bonds may be concerning (who knows the actual credit risk there) but it’s a relatively small percentage and balanced against a lot of high-quality municipal bonds, so I’m not too worried about it.

Sector composition and weights

When you look at BKN from a sector composition point of view. It’s a different rating approach than you see on the corporate bond side of things.

Transportation constitutes the largest allocation at 19%, while corporate facilities constitute 15.1%. It’s harder to get a handle on the other categories in terms of what they fund (local and state-backed taxes don’t have any breakdown from that standpoint), but the breakdown here at least gives confidence that it’s a well-diversified mix of exposures.

Peer comparison

One ETF (not a closed-end fund) worth comparing to is the iShares National Muni Bond ETF (MUB), the benchmark in the world of municipal bond index funds. The credit qualities are almost the same. When we compare BKN to MUB on a price ratio basis, we find that BKN has lagged. A lot of this may be due to BKN fees (3.4% total expense ratio) than anything else. Also keep in mind that closed-end funds can trade at discounts and premiums, which adds an issue to how you think about relative performance.

Another key aspect of BKN is its use of leverage. Currently, this ratio is just under 32%, which also adds to the fee in terms of interest expenses compared to MUB. This has two effects as it lengthens the duration of the fund (currently at 12.27 years) and adds some additional yield (currently at 5.37%).

Pros and Cons

Perhaps the most valuable long-term advantage of BKN is that distributions from the fund are exempt from federal income tax. This tax-advantaged status can significantly increase BKN’s total return potential, making it attractive to those looking to maximize their return and minimize their tax liability.

The real danger here? For me, it’s actually more than leverage. I’m not worried about the credit risk side of things, since in most cases it’s backed by taxes. Although leverage increases the potential for volatility in general.

The bottom line: Build tax-efficient income

BKN is a tax-efficient income play and capital preservation. The overall portfolio composition looks healthy, and is a more convenient way to access space rather than selecting individual securities. Just keep in mind that the closed box structure is not ideal. Overall, though, a good box.

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