Best of the Week
Most Popular
1. US Housing Market House Prices Bull Market Trend Current State - Nadeem_Walayat
2.Gold and Silver End of Week Technical, CoT and Fundamental Status - Gary_Tanashian
3.Stock Market Dow Trend Forecast - April Update - Nadeem_Walayat
4.When Will the Stock Market’s Rally Stop? - Troy_Bombardia
5.Russia and China Intend to Drain the West of Its Gold - MoneyMetals
6.BAIDU (BIDU) - Top 10 Artificial Intelligence Stocks Investing To Profit from AI Mega-trend - Nadeem_Walayat
7.Stop Feeding the Chinese Empire - ‘Belt and Road’ Trojan Horse - Richard_Mills
8.Stock Market US China Trade War Panic! Trend Forecast May 2019 Update - Nadeem_Walayat
9.US China Trade Impasse Threatens US Lithium, Rare Earth Imports - Richard_Mills
10.How to Invest in AI Stocks to Profit from the Machine Intelligence Mega-trend - Nadeem_Walayat
Last 7 days
Silver Long-Term Trend Analysis - 18th June 19
IBM - Watson Deep Learning - AI Stocks Investing - Video - 18th June 19
Investors are Confident, Bullish and Buying Stocks, but… - 18th June 19
Gold and Silver Reversals – Impossible Not to Notice - 18th June 19
S&P 500 Stuck at 2,900, Still No Clear Direction - 17th June 19
Is Boris set to be the next Conservation leader? - 17th June 19
Clock’s Ticking on Your Chance to Profit from the Yield Curve Inversion - 17th June 19
Stock Market Rally Faltering? - 17th June 19
Johnson Vs Gove Tory Leadership Contest Grudge Match Betfair Betting - 17th June 19
Nasdaq Stock Index Prediction System Is Telling Us A Very Different Story - 17th June 19
King Dollar Rides Higher Creating Pressures On Foreign Economies - 17th June 19
Land Rover Discovery Sport Tailgate Not Working Problems Fix (70) - 17th June 19
Stock Market Outlook: is the S&P today just like 2007 or 2016? - 17th June 19
US China War - Thucydides Trap and gold - 16th June 19
Gold Stocks Bull Upleg Mounting - 16th June 19
Gold Price Seasonal Trend Analysis - Video - 16th June 19
Fethiye Market Fruit, Veg, Spices and Turkish Delight Tourist Shopping - 16th June 19
US Dollar Gold Trend Analysis - 15th June 19
Gold Stocks “Launch” is in Line With Fundamentals - 15th June 19
The Rise of Silver and Major Economic Decline - 15th June 19
Fire Insurance Claims: What Are the Things a Fire Claim Adjuster Does? - 15th June 19
How To Find A Trustworthy Casino? - 15th June 19
Boris Johnson Vs Michael Gove Tory Leadership Grudge Match - Video - 14th June 19
Gold and Silver, Precious Metals: T-Minus 3 Seconds To Liftoff! - 14th June 19
Silver Investing Trend Analysis - Video - 14th June 19
The American Dream Is Alive and Well - in China - 14th June 19
Keeping the Online Gaming Industry in Line - 14th June 19
How Acquisitions Affect Global Stocks - 14th June 19
Please Don’t Buy the Dip in Nvidia or Other Chip Stocks - 14th June 19
A Big Thing in Investor Education is Explainer Videos - 14th June 19
IRAN - The Next American War - 13th June 19
Boris Johnson Vs Michael Gove Tory Leadership Grudge Match Contest - 13th June 19
Top Best VPN Services You Can Choose For Your iPhone - 13th June 19
Tory Leadership Contest Betting Markets Forecast - Betfair - 13th June 19
US Stock Market Setting Up A Pennant Formation - 13th June 19
Which Stocks Will Lead The Cannabis Rebound? - 13th June 19
The Privatization of US Indo-Pacific Vision - Project 2049, Armitage, Budget Ploys and Taiwan Nexus - 12th June 19
Gold Price Breaks to the Upside - 12th June 19
Top Publicly Traded Casino Company Stocks for 2019 - 12th June 19
Silver Investing Trend Analysis - 12th June 19
Why Blue-Chip Dividend Stocks Aren’t as Safe as You Think - 12th June 19
Technical Analysis Shows Aug/Sept Stock Market Top Pattern Should Form - 12th June 19
FTSE 100: A Top European Index - 12th June 19
Gold Surprise! - 11th June 19
How Forex Indicators are Getting Even More Attention in the Market? - 11th June 19
Stock Market Storm Clouds on the Horizon - 11th June 19
Is Your Financial Security Based On A Double Aberration? - 11th June 19
What If Stocks Are Wrong About Interest Rate Cuts? - 11th June 19
US House Prices Yield Curve, Debt, QE4EVER! - 11th June 19
Natural Gas Moves Into Basing Zone - 11th June 19
U.S. Dollar Stall is Good for Commodities - 11th June 19
Fed Running Out of Time and Conventional Weapons - 11th June 19
Trade Wars Propelling Stock Markets to New Highs - 11th June 19
Best Travel Bags for Summer Holidays 2019, Back Sling packs, water proof, money belt, tactical - 11th June 19
Betting on Next British Prime Minister Tory Leadership Betfair Markets Forecast - 10th June 19
How Can Stock Market Go Up When We’re Headed Towards a Recession? - 10th June 19
If You Invest in Dividend Stocks, Do This to Double Your Returns - 10th June 19
Reasons for the Success of the Dating Market - 10th June 19
Gold Price Trend Analysis - Video - 10th June 19
US Stock Markets Rally Hard – Could Another Big Upside Leg Begin? - 10th June 19
Stock Market Huge Cosmic Cluster Ahead: Buckle Up! - 10th June 19
Stock Market Higher To Go? - 10th June 19
The Gold Price Golden Neckline… - 10th June 19
Gold Price Seasonal Trend Analysis - 9th June 19
The Fed Stops Pretending - 9th June 19
Fed Rate Cuts Soon; Bitcoin Enthusiasts Join Wall Street in Bashing Gold - 9th June 19
1990s vs. 2010s - Which Expansion Will be Better for Gold? - 9th June 19
Gold Price Trend Analysis, MACD, Trend Channels, Support / Resistance - 8th June 19
Gold Surges Near Breakout - 8th June 19
Could Gold Rally Above $3750 Before December 2019? - 8th June 19
5 Big Lies About Precious Metals Investing Exposed - 8th June 19

Market Oracle FREE Newsletter

Gold Price Trend Forecast Summer 2019

Closed End Funds, A Safer Way to Buy Stocks

Stock-Markets / Investing 2009 Jul 09, 2009 - 12:09 PM GMT

By: Q1_Publishing

Stock-Markets

Best Financial Markets Analysis ArticleThe last few days have sent a lot of investors scurrying back to the sidelines.

The correction, which I’ve been calling the most widely anticipated correction in years, has reignited fears that even an anemic recovery might be farther away than most investors expect.


If you turn on CNBC, you’d think it was just as bad as last fall. That was when forced-selling was driving down the price of every asset class. The bankruptcy of automakers was going to result in a catastrophic loss of 3 million jobs. The economy was shedding 500,000 jobs a month and the only solution to “prevent unemployment from climbing past 8%” was $787 billion in government stimulus.

It was a period when no one really knew what was going to happen next, how bad it would get, and uncertainty was dominant.

Since then a lot has changed. It turns out the world economy is not coming to an end. Granted, it’s going look a lot different throughout a prolonged “L-shaped” recession. But the economy is not going to fall apart completely.

Despite it all, the markets are acting like we’re at the precipice of a financial cliff again. And that is creating opportunities out there.

Of course, during downturns you just have to look a little harder for the opportunities. That’s why I’ve been turning back to the often overlooked closed-end funds (CEF).

The Contrarian Way to Trounce Mutual Funds

CEFs can be excellent tools to help you beat the markets if used correctly. Or they can just as easily drag down overall returns if used incorrectly. As with everything else in the investing world, it all depends on timing. Right now the time is almost right for CEFs to be helpful.

You see, CEFs trade at a premium or discount to net asset value. The net asset value (NAV) is the total value of all the securities – stocks, bonds, etc. – held by the fund. If the CEF trades for more than its NAV, it’s trading at a premium. If the CEF’s market price is less than the NAV, it’s trading at a discount.

When the markets in general or a sector is really hot, demand for a CEF will sometimes make it trade at a premium.

The perfect example of this is when China was all the rage back in 2007. The few China CEF’s were fetching premiums of anywhere between 20% and 40%. That’s like paying $1.20 to $1.40 for each dollar in assets.

CEFs trade at a discount to their net asset value most of the time though. That’s because it doesn’t make much sense to pay more than the underlying value for an asset. After all, would you take your money to the bank if they credit your account for $1 for every $1.10 you deposit? Well, that’s what it’s like when you buy a CEF at a premium to NAV.

It’s their unique structure which allows investors to use CEFs to buy into the market or a sector at a discount. Since they trade at the steepest discounts when a particular sector follows out of favor, buying them when discounts are high is a good way to place a contrarian bet on a sector at a better price than any mutual fund or ETF would offer otherwise.

Getting a “Head Start” on Stocks

Buying CEF’s at steep discounts is like getting a head start on stocks. You get instant diversification, a lower starting point, reduced risk, and greater upside potential.

 Just take a look at the opportunity shaping up in healthcare. We all know the healthcare sector has exceptional upside potential. It’s something we’ve been over quite a bit over the past year.

Despite the obvious opportunity, I’ve recommended waiting for the right time to buy in. We knew the government was going to get involved, there would be a lot of debate, and there would be a lot of uncertainty in the sector along the way. It’s all playing out in real time now.

So here’s the thing. Trying to time a bottom in the market, a sector, or a stock is next to impossible. But by using CEFs we can get in cheaper and be positioned for the all the upside with less risk and volatility too.

The perfect example is BlackRock Health Sciences Trust (NYSE:BME).  BlackRock’s Health Sciences Trust is a CEF focused on the biotech and pharmaceuticals sector. The fund’s top holdings include biotech bellwethers like Wyeth (NYSE:WYE), Amgen (NASDAQ:AMGN), and Gilead Sciences (NASDAQ:GILD).

Nothing too exciting there, I know. You’d find these stocks in most any biotech or pharmaceutical focused ETF or mutual fund. All of the stocks are widely held, actively traded and could easily be bought and sold with a quick phone call or a few clicks of the mouse.

But you’d have to pay full market price to buy them directly through the market, through an ETF which is required to trade very close to its NAV, or with a mutual fund which has its price matched to the market at the end of the day.

CEF’s are different. If you wanted exposure to these stocks and the rest of the sector, you could buy a CEF like the BlackRock Health Sciences Trust. It currently trades at a discount of more than 9% to its NAV. It’s like starting out 9% ahead of the market. On top of that, the CEF pays cash distributions at a 7.3% annual rate. That’s higher than most of its holdings.

That’s the main advantage of CEFs. They are a way to win more when the market goes with you and lose less when the market goes against you. The discount offers a buffer against the downside since it’s already undervalued. And CEF’s offer more upside because they increase in market value from an increase in the NAVs and as the discounts shrink or turn into a premium.

Another Tool in Your Investing Toolbox

As you can see, CEF’s are a way to buy discounted positions, reduce risk, and increase upside potential. They can be very helpful for any portfolio if purchased at the right time. But that’s not all CEF’s are good for.

As we’ve looked at every time the markets take a turn for the worse, we use CEF’s (as a group) to help us get a firm reading on bearish sentiment. For instance, last October we were using CEF market data as one of the Five Signs of a Market Bottom.

At the time the markets were collapsing and identified:

Two weeks ago, when the markets seemed like they just couldn’t get any worse, only 18 of the 597 closed-end funds were fetching a premium. That was the lowest number I have ever seen. The bearish sentiment in closed-end funds was peaking.

Now, 57 of the funds are trading at a premium. By historical standards, anywhere from 35% to 50% of them should be trading at a premium during a flat market. With only 9.5% of them trading at a premium to net asset value, the markets are clearly overly bearish.

Right now, only 17% of them are trading at a premium. Which proves bearish sentiment is low and could get a little bit worse, but it’s not likely to get much worse from here.

With that in mind, I hope you take this opportunity to look at all the CEF’s out there. They offer so many more advantages over ETFs or mutual funds. And as we enter a market period where 10% to 15% annual returns are the exception rather than the norm, CEFs will help you work out a bit of extra return with less risk. And that’s a valuable proposition in any type of market.

Good investing,

Andrew Mickey
Chief Investment Strategist, Q1 Publishing

Disclosure: Author currently holds a long position in Silvercorp Metals (SVM), physical silver, and no position in any of the other companies mentioned.

Q1 Publishing is committed to providing investors with well-researched, level-headed, no-nonsense, analysis and investment advice that will allow you to secure enduring wealth and independence.

© 2009 Copyright Q1 Publishing - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Q1 Publishing Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules