Evaluating the Yield and Risk of Virtus Convertible & Income Fund II’s 5.500% Series A Cumulative Preferred Shares (NCZ PR A)

Investors seeking income in a volatile market often turn to preferred shares, particularly those issued by closed-end funds (CEFs). The Virtus Convertible & Income Fund II’s 5.500% Series A Cumulative Preferred Shares (NCZ PR A) offer a compelling case study in balancing yield with risk. As of August 2025, these shares trade at $20.85, a 16.6% discount to their $25.00 liquidation preference, while delivering a robust yield of 6.59% based on an annualized dividend of $1.375 [1]. However, the fund’s investment strategy and structural complexities warrant careful scrutiny.

Yield Attraction and Credit Quality

The 6.59% yield of NCZ PR A is among the highest for A-rated preferred shares, as confirmed by Fitch Ratings [2]. This rating reflects the fund’s ability to service leverage costs through recurring investment income, though S&P and Moody’s have not explicitly rated the shares [3]. The fund’s portfolio, which includes 61.82% convertible securities and 35.18% high-yield bonds as of June 30, 2025 [4], contributes to its income generation but introduces credit risk. Notably, 50.90% of its fixed-income holdings are rated below BBB or unrated [4], amplifying exposure to default risk.

Portfolio and Leverage Risks

Virtus Convertible & Income Fund II employs leverage, with effective leverage at 36.16% of total assets as of August 2025 [5]. This amplifies both gains and losses, a critical consideration for preferred shareholders. The fund’s high portfolio turnover rate (118% as of January 2025 [5]) further suggests active management, which may increase transaction costs and reduce net returns. Additionally, the fund’s focus on below-investment-grade bonds—often dubbed “junk” bonds—heightens sensitivity to economic downturns and interest rate shifts.

Market Dynamics and Structural Complexity

NCZ PR A’s current discount to liquidation preference raises questions about the fund’s NAV performance. Callable preferred shares, like NCZ PR A, add another layer of risk: if interest rates decline, the fund may redeem the shares at a predetermined price, locking in gains for investors but potentially limiting upside [6]. The cumulative nature of the shares (unpaid dividends accrue) offers some protection, but investors must weigh this against the fund’s leverage and portfolio volatility.

Conclusion: A High-Yield Proposition with Caveats

NCZ PR A presents an attractive yield for income-focused investors, particularly those comfortable with moderate credit risk. Its Fitch “A” rating and 6.59% yield position it as a strong contender in the preferred share market. However, the fund’s reliance on high-yield bonds, leverage, and active trading strategies necessitate a nuanced risk assessment. Investors should monitor the fund’s NAV performance, interest rate environment, and potential redemption risks before committing capital.

Source:
[1] 5.50% Series A Cumulative Preferred Shares (NCZ.PRA) [https://www.preferredstockchannel.com/symbol/ncz.pra/]
[2] Virtus Convertible & Income Fund II Announces Quarterly Distribution [https://www.businesswire.com/news/home/20250902293443/en/Virtus-Convertible-Income-Fund-II-Announces-Quarterly-Distribution-5.500-Series-A-Cumulative-Preferred-Shares]
[3] Virtus Convertible & Income Fund II [https://www.virtus.com/products/virtus-convertible-income-fund-ii]
[4] Virtus Convertible & Income Fund II:NCZ [https://www.cefconnect.com/fund/NCZ]
[5] Virtus Convertible & Income Fund II Announces Quarterly Distribution [https://www.businesswire.com/news/home/20250902293443/en/Virtus-Convertible-Income-Fund-II-Announces-Quarterly-Distribution-5.500-Series-A-Cumulative-Preferred-Shares]
[6] 5.50% Series A Cumulative Preferred Shares (NCZ.PRA) [https://www.preferredstockchannel.com/symbol/ncz.pra/]