First Trust High Yield Opportunities 2027 Term Fund: A Monthly Dividend Play with Caution

The First Trust High Yield Opportunities 2027 Term Fund (FIST) recently announced its May distribution of $0.125 per share, continuing its strategy of monthly income for investors. This closed-end fund, structured to mature in February 2027, has become a focal point for income seekers in a low-yield environment. But what does this monthly payout signify for investors, and how does FIST stack up against other high-yield options? Let’s break it down.

Understanding FIST: Structure and Strategy

FIST invests primarily in high-yield corporate bonds (commonly called “junk bonds”), which typically offer higher yields than investment-grade debt but carry greater credit risk. The fund’s term structure means it has a defined lifespan—ending in 2027—after which it will liquidate its assets and return proceeds to shareholders. This differs from perpetual funds like iShares iBoxx $ High Yield Corporate Bond ETF (HYG), which have no maturity date.

The fund’s monthly distribution of $0.125 per share translates to an annualized yield of 6.0% based on its recent net asset value (NAV). This is competitive with broader high-yield ETFs like HYG (current yield ~4.5%) but comes with unique risks tied to its closed-end structure and term design.

Performance and Yield: What’s Driving the Payout?

FIST’s ability to sustain a 6.0% yield hinges on its portfolio composition and leverage. Closed-end funds often use leverage (borrowed funds) to amplify returns, but this also increases volatility. The fund’s prospectus indicates it may use up to 33% leverage, a common practice in the sector.

Historically, FIST has outperformed its ETF peers during periods of rising interest rates due to its shorter duration profile, which reduces sensitivity to rate hikes. However, its NAV has dipped in volatile markets, such as during the 2022 bond selloff, when high-yield debt fell sharply.

Key Considerations for Investors

1. Yield Sustainability

While FIST’s 6.0% yield is attractive, a portion of its distributions may come from return of capital (ROC), not just income. Investors should monitor the fund’s SEC yield—a standardized measure of income—versus its stated distribution rate. If the SEC yield consistently trails the payout, it could signal future cuts.

2. Credit Risk

High-yield bonds are issued by companies with lower credit ratings, making them vulnerable to economic downturns. FIST’s portfolio includes issuers in cyclical sectors like energy and industrials, which could struggle if recession risks materialize.

3. Term Fund Dynamics

As FIST approaches its 2027 maturity, its NAV will converge toward its liquidation value. This “duration decay” could reduce the fund’s price over time, especially if interest rates remain elevated.

4. Closed-End Fund Premiums/Discounts

Closed-end funds often trade at a premium or discount to their NAV. FIST currently trades at a 2% premium, meaning investors pay more than the underlying asset value. This could reverse if market sentiment shifts, eroding returns.

Alternatives and Competitors

For comparison, the iShares High Yield ETF (HYG) offers broader diversification and lower leverage (no leverage), while the SPDR Bloomberg High Yield Bond ETF (JNK) focuses on senior loans and floating-rate instruments. Both have lower expense ratios (HYG: 0.47% vs. FIST’s ~0.85%) and avoid term fund expiration risks.

Conclusion: A High-Yield Option, But Not Without Risks

FIST’s monthly $0.125 distribution and 6.0% yield make it a compelling income play for investors willing to tolerate closed-end fund risks. Its term structure and shorter duration profile offer advantages in a rising-rate environment, and its consistent payout history to date is a positive sign. However, the fund’s reliance on leverage, credit-heavy portfolio, and eventual liquidation date mean it’s best suited for aggressive investors with a 2–3 year horizon.

Final Take:
- For: Income seekers who can stomach volatility and want a tactical high-yield play.
- Against: Those prioritizing capital preservation or long-term growth.

Before investing, evaluate FIST’s SEC yield, leverage usage, and discount/premium trends. In a low-yield world, its income stream is hard to ignore—but don’t overlook the fine print.

Data as of April 2025. Past performance does not guarantee future results. Consult a financial advisor before making investment decisions.