What is the minimum asset coverage ratio for leveraged Closed-End ETFs?
The Investment Company Act of 1940 requires that a fund asset’s coverage be at least 200% of assets to provide adequate protection for senior securities. Higher coverage provides for a greater margin of safety. For example, suppose a Closed-End ETF has $500 million in assets and wants to add $100 million of leverage (with a 7.5% cumulative preferred share issue). After issuing the preferred shares, the fund’s capital structure would consist of $600 million in total assets, $100 for preferred shares and $500 for common shares. This results in a $600 million total shares / $100 million preferred shares, or a 600% asset coverage ratio.
