Assessing the Sustainability of XFLT's High Yield in a Deteriorating NAV Environment

The XAI Octagon Floating Rate & Alternative Income Term Trust (XFLT) has long captivated income investors with its eye-catching 16.1% yield according to Seeking Alpha, a figure that dwarfs most high-yield credit instruments. However, as of November 2025, the fund's deteriorating net asset value (NAV) and structural vulnerabilities raise critical questions about the sustainability of its payouts. For income investors, the key challenge lies in balancing the allure of high yields against the risks of capital erosion and distribution instability in a volatile market environment.

The Attraction: High Yield and NAV Discount

according to Seeking Alpha according to Stock Analysis, a consistency that has persisted since its inception in 2017 according to Seeking Alpha. Compounding this appeal is the fund's trading discount to NAV, which stood at -7.96% in November 2025 (share price: $5.55 vs. . Such a discount often signals undervaluation, potentially offering a margin of safety for income-focused investors. Historically, XFLT has traded at even wider discounts, , suggesting that market conditions may eventually drive a re-rating.

However, this discount comes at a cost. , and . These figures underscore a troubling trend: while XFLT generates income, its capital preservation metrics are severely compromised.

The Risks: Leverage, Expense Ratios, and NAV Erosion

XFLT's investment strategy relies heavily on leveraged assets, including (CLO) equity, which are inherently volatile. As of August 2025, the fund's effective leverage , according to CEF Connect. While leverage can amplify returns in stable markets, it exacerbates losses during downturns-a critical concern given the "" impacting .

Compounding these risks is XFLT's high expense ratio. according to Seeking Alpha, according to Dividend.com. Regardless of the exact figure, such costs are among the highest in the high-yield credit space and erode returns, particularly in a low-growth environment. Furthermore, . according to SEC filings, this metric does not account for the quality of earnings. Distributions are , which are unsustainable in the long term.

Distribution Sustainability: A Tenuous Balance

according to SEC filings hinges on its capacity to generate consistent net investment income. Yet, the fund's reliance on issuing new shares to fund distributions-a practice noted in Q3 2025 analyses according to Seeking Alpha-raises concerns about dilution and long-term viability. This approach may mask underlying weaknesses in the portfolio's income-generating capacity, particularly as defaults in CLO equity holdings rise.

Moreover, XFLT's NAV performance has been mixed. While the fund , lags behind peers. according to CEF Connect according to CEF Connect, according to CEF Connect. For income investors, .

Risk-Reward Analysis for Income Investors

For investors prioritizing income, XFLT's yield is undeniably compelling. However, the fund's risk profile demands careful scrutiny. The combination of high leverage, volatile assets, and elevated expenses creates a fragile foundation for distribution sustainability. While the NAV discount may eventually narrow, offering capital appreciation potential, this outcome is far from guaranteed in a market marked by "fear of defaults" according to Seeking Alpha and economic uncertainty according to Seeking Alpha.

A prudent approach would involve assessing XFLT as a speculative bet rather than a core holding. Investors with a high risk tolerance and a focus on income might allocate a small portion to XFLT, hedging against its volatility with more stable high-yield alternatives. Conversely, those prioritizing capital preservation should avoid the fund, according to Seeking Alpha and exposure to .

Conclusion

XFLT exemplifies the classic trade-off between yield and risk. Its 16.1% yield according to Seeking Alpha is a siren call for income-starved investors, but the deteriorating NAV environment and structural vulnerabilities demand caution. according to SEC filings according to CEF Connect offer some comfort, they cannot offset the risks posed by leverage, high expenses, and a distribution model reliant on capital gains. For income investors, XFLT remains a high-risk proposition-one that requires rigorous due diligence and a clear understanding of the potential for both reward and loss.