The Strategic Case for High-Yield Closed-End Funds in a Rising Inflation Environment

In an era where inflation has become a persistent specter, investors are increasingly scrutinizing traditional asset classes for their ability to preserve purchasing power. The past five years-marked by supply chain disruptions, energy shocks, and aggressive monetary policy-have exposed the vulnerabilities of conventional inflation hedges. Treasury Inflation-Protected Securities (TIPS), gold, and even real estate have underperformed expectations, leaving a void that high-yield closed-end funds (CEFs) like the BlackRock Enhanced Global Dividend Trust (BOE) and the Invesco Global Dividend Equity Fund (IGD) may be uniquely positioned to fill.

The Inflation Conundrum and Traditional Hedges

According to a MSCI report, TIPS-based inflation assets averaged an annual return of -2.2% from 2008 to 2020, lagging behind U.S. Treasuries and corporate bonds. This underperformance, exacerbated by rising risk-free rates in 2022, highlights a critical flaw in traditional hedges: their sensitivity to discount rates on future cash flows. Meanwhile, gold, long a symbol of inflation protection, struggled against the strong U.S. dollar and rising nominal interest rates, while real estate faced declining occupancy and rising carrying costs, as noted in the MSCI report. These shortcomings underscore the need for alternative strategies.

High-Yield CEFs: A New Frontier for Income and Inflation Defense

High-yield CEFs, particularly those with managed distribution policies, have emerged as compelling options. The BlackRock Enhanced Global Dividend Trust (BOE), for instance, has maintained a quarterly dividend of $0.0827 per share, translating to a forward yield of 2.85% as of November 2025, according to a Seeking Alpha article. However, approximately 88% of these distributions stem from return of capital rather than net investment income or capital gains, as the Seeking Alpha article notes. While this structure ensures consistent cash flow, it also raises questions about sustainability and the erosion of net asset value (NAV) over time.

Similarly, the Invesco Senior Income Trust (VVR) and Invesco High Income Trust II (VLT) have retained stable distribution rates despite abandoning their managed distribution plans, allowing greater flexibility in a volatile interest rate environment, as reported in a Morningstar article. This adaptability is crucial in a rising inflation context, where income streams must adjust to shifting market conditions.

Performance Metrics and Strategic Implications

Data from BlackRock reveals that BOE and IGD delivered average annual total returns of 10.60% and 12.86%, respectively, over the five-year period ending September 2025, as detailed in a Globe and Mail article. These figures outpace the U.S. cumulative inflation rate of 23% since 2020, though they fall short of the hyperinflationary extremes seen in Argentina (2,614%) or Hungary (52%), as noted in a Visual Capitalist chart. For investors seeking real returns in moderate inflation environments, these CEFs present a viable case.

However, the discount dynamics of these funds warrant closer examination. As of March 2025, BOE traded at a -9.12% discount to NAV, while IGD's peer, the BlackRock Enhanced International Dividend Trust (BGY), traded at -8.66%, as reported in a QuantisNow analysis. These discounts prompted tender offers at 98% of NAV, aiming to enhance shareholder value and reduce liquidity premiums, as the QuantisNow analysis notes. Such strategies highlight the importance of monitoring fund discounts as a proxy for market sentiment and potential arbitrage opportunities.

Risks and Considerations

The reliance on return of capital distributions, while beneficial for income stability, carries tax implications. Shareholders may face reduced tax bases, potentially leading to higher capital gains taxes upon redemption, as the Seeking Alpha article explains. Additionally, the performance of CEFs is often sector-dependent. For example, energy and infrastructure companies like Uniper and Aspen Aerogels saw earnings decline in 2025 due to lower power prices and soft demand, indirectly affecting CEFs with exposure to these sectors, as the Uniper and Aspen Aerogels articles detail.

Conclusion: Balancing Income and Inflation Defense

High-yield CEFs like BOE and IGD offer a strategic blend of income generation and inflation resilience, particularly in moderate inflation environments. Their ability to maintain distributions through return of capital and adapt to interest rate shifts provides a buffer against traditional asset class shortcomings. Yet, investors must remain vigilant about NAV erosion, sector-specific risks, and the tax consequences of distribution structures. As the global economy navigates an uncertain inflationary landscape, these funds represent a nuanced tool for those seeking to balance yield with capital preservation.