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Eaton Vance Limited Duration Income Fund sports a nearly 9.5% yield. Eaton Vance Short Duration Diversified Income Fund’s yield is around 8%. The risks involved favor the lower yield. Financial markets are in a state of flux right now. With the Federal Reserve continuing to keep interest rates at low levels, some might argue that there’s no need to worry. However, the Fed is keeping rates low because of weak global growth — certainly not a good thing. And how long can rates stay this low before unintended consequences start to rear their ugly heads? If you are the least bit concerned about the markets and interest rates Eaton Vance Limited Duration Income Fund (NYSEMKT: EVV ) and Eaton Vance Short Duration Diversified Income Fund (NYSE: EVG ) both sound like good places to hide in a storm. But that’s worth a closer look… Birds of a feather? EVV and EVG both share a similar mandate, providing investors with a high-level of current income. Capital appreciation is a secondary consideration for each. In addition, both closed-end funds, or CEFs, try to provide broad exposure to the fixed income markets while limiting interest rate risk. EVV’s duration is targeted to be between two and five years, while EVG is a little more conservative in that its duration is expected to be no more than three years. Although that’s a difference, it’s not exactly a huge one. At the end of the second quarter, EVV’s duration was around 3.2 years and EVG’s was around 2.1 years. Both funds, meanwhile, make use of leverage, something that can increase gains in good times but exacerbates losses in bad times. EVV and EVG even share five of six managers (EVV has six people steering the boat, EVG only five). One big difference between the pair is size. EVV has more than six times the assets of EVG, which helps explain why there’s an extra hand at the wheel. But this isn’t the only difference you’ll want to be aware of. The big obvious one for most investors will be the distribution yield. EVV’s yield is around 9.4%, roughly 17% higher than EVG’s 8%. That said, the yields are based on NAV at both funds, which are trading at over 10% discounts and are more reasonable, with EVV’s NAV yield at around 8.1% and EVG’s NAV yield of just about 7%. Based on this quick look, you might just go for the higher yield from the larger fund. But don’t jump just yet. A quick look at the engine Although duration is very important in the bond world, since it gives you an idea of the impact that interest rate changes will have on your return, it isn’t the only factor to watch for. (The longer the duration, the more impact interest rate changes will have.) Another important one is credit quality. While short durations can help to limit the risk of lower quality debt, since it will get paid off relatively quickly, it doesn’t remove the risk. And with investor concern high, low-quality debt has been taking a big hit. Perhaps rightly so. And that’s an important comparison point at EVV and EVG. At the end of the second quarter, EVV’s portfolio was made up of about 30% investment grade debt. So 70% of what it owns could be characterized as high-yield or “junk.” To be fair, BB, the highest-quality high-yield debt, makes up about 30% of that, but it still has heavy exposure to risky borrowers. EVG, on the other hand, had about half of its portfolio in investment grade issuers. There was another 25% or so in BB issuers. Of the two, EVG’s exposure to credit risk is much less than its sibling’s. That helps account for the lower yield, too, since higher-quality bonds tend to pay less interest than lower-quality fare. For investors concerned about a coming market storm, then, EVG appears to the less risky option. True, it has a lower yield, but that might be a worthwhile trade-off if you were looking at EVV and EVG to find a “safe” short-duration CEF bond fund to hide in. That said, there are some other factors to consider, too. For example, EVG’s portfolio is about two-thirds U.S. debt. EVV’s U.S. exposure is higher at around 85%. You could look at this difference in one of two ways. On the one hand, more diversification is better. On the other, sticking close to home may prove to be a more astute choice if the U.S. turns out to be the cleanest dirty shirt if, in my opinion when, the markets hit more turbulence. Then there’s the issue of long-term performance. Over the trailing 10 years through September, EVV’s annualized NAV return, which includes reinvested distributions, was about 6.4%. EVG’s annualized return over that span was about 5%. But that was then, and this is now. For example, over the trailing six months through September, EVG’s NAV loss was around 1.7% and EVV’s loss was nearly 3%. In September alone, EVV lost nearly 2% of its net asset value. EVG fell about 0.5% in September. So it looks like EVG has the edge when risk starts to matter, but EVV’s risk taking has paid off over the longer term. That, of course, is the big trade-off in investing: Risk vs. reward. Right now, I’d err on the side of caution and give EVG the edge if you are watching this pair. That said, if you buy EVG, you might want to keep an eye on EVV for a time when the skies are a little more clear. Scalper1 News
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