The 17.9% yield of the Guggenheim Strategic Opportunities Fund (GOF -3.90%) is enticing, and as you will see shortly, this fund has an excellent record of distributions to investors. Still, the key questions are: Is it sustainable, and what do you have to believe to think it's sustainable? Here's the lowdown.
The Guggenheim Strategic Opportunities Fund
It's a closed-end fund, so it doesn't raise new capital from investors. Like many other closed-end funds, it uses debt and leverage to generate higher returns for investors.
NYSE: GOF
Key Data Points
Digging into the fund's prospectus, strategy, and holdings, it says it aims to "maximize total return through a combination of current income and capital appreciation" by "investing in a wide range of fixed income and other debt and senior equity securities."
It's primarily a fixed-income fund with 92.3% of assets currently in fixed-income investments and the rest in equities, with a tiny amount in derivatives. On the basis that a credit rating of BBB and above is an investment-grade rating, the fund has about 39.5% in investment-grade debt, with the rest below-investment grade.
So far, so good. You won't get outsize returns by only investing in investment-grade debt. Moreover, investing in fixed income and equities is a common strategy, and there's nothing wrong with using leverage to generate returns for a closed-end fund.
However, four red flags about this fund make it worth avoiding.
Image source: Getty Images.
1. Investment income doesn't cover the distribution
The distribution is being funded by returning capital rather than investment income or even capital gains on assets. The following chart illustrates this point very clearly.
The current annual distribution is equivalent to $2.19, and since 2019, the fund has been returning capital (yellow column) to pay it. Also, from 2019 to 2024, the distribution percentage coming from net investment income ranged from 51% to a low of 35% in 2023.
Eagle-eyed readers will note that net investment income did cover the $1.09 per share in distribution in the first half of 2025 -- a point I'll return to later.
For now, note that the fund returned capital to sustain the dividend for the five years through 2023.
Data source: fund literature. Chart by author.
2. Net asset value has declined
One issue with returning capital is that it's to the detriment of net assets. Indeed, the fund's net asset value (NAV) has declined since 2018, and the last reported NAV at $11.47 per share. The shares now trade at about $14, a premium of almost 20% to NAV -- and the premium was much higher before the recent market retreat.
Anyone buying the fund at this price is paying a hefty premium on the assumption that the fund will sustain its distribution. That's much harder to do when capital is used to pay distributions.
Data source: fund literature. Chart by author.
3. The fund is using more leverage to generate returns
Management discussed leverage in its reporting, saying in its semiannual report in November, "One purpose of leverage is to fund the purchase of additional securities that may provide increased income and potentially greater appreciation."
One way it's doing this is through reverse repurchase agreements. These involve the fund transferring an asset to a counterparty for cash and an agreement to repurchase the asset at a higher price. As noted above, it's effectively borrowing and taking on leverage to generate greater returns.
It's something the fund is using more often, and that adds risk.
Data source: fund literature. Chart by author.
4. The fund relies on trading conditions that might not repeat
Going back to the first chart above, in the six months ended Nov. 30, the fund did generate the net investment income to just about cover the distribution. In addition, the fund's NAV rose 9.5% during the six months on a total return basis.
That's good news, but consider that it was an extremely favorable period for the fund, which is unlikely to repeat. Discussing the strong performance in its semiannual report, management said, "The yield curve bull steepened, meaning yields at the short end of the curve fell more than the long end, with yields on 2-year and 10-year Treasuries finishing 72 basis points and 33 basis points lower, respectively."
I'll translate by explaining the following charts. In the six months ended Nov. 30, the two-year yield dropped more than the 10-year as the market priced in near-term interest rate cuts, so the price of short-term bonds increased more than long-term bonds. That was good for the fund.
10-Year Treasury Rate data by YCharts.
However, while that trend still holds since Nov. 30, it's not a move of the same magnitude.
10-Year Treasury Rate data by YCharts.
As such, the fund's NAV declined from $11.94 at the end of November to $11.47 at present, so you can look at the fact that its first-half 2025 investment income covered its distribution as a result of very favorable market conditions that are unlikely to hold up.
One to avoid
Increasing leverage, paying distributions out of capital, NAV that's sliding, and relying on favorable market conditions to barely cover distributions with net investment income is not a recipe for a high probability of sustaining a distribution. Consequently, most risk-averse investors will want to give this fund a pass since there's a significant risk the distribution will be cut in the future.
