Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Gold, Silver & HUI Stocks Big Pictures - 28th Sep 20
It’s Time to Dump Argentina’s Peso - 28th Sep 20
Gold Stocks Seasonal Plunge - 28th Sep 20
Why Did Precious Metals Get Clobbered Last Week? - 28th Sep 20
Is The Stock Market Dow Transportation Index Setting up a Topping Pattern? - 28th Sep 20
Gold Price Setting Up Just Like Before COVID-19 Breakdown – Get Ready! - 27th Sep 20
UK Coronavirus 2nd Wave SuperMarkets Panic Buying 2.0 Toilet Paper , Hand Sanitisers, Wipes... - 27th Sep 20
Gold, Dollar and Rates: A Correlated Story - 27th Sep 20
WARNING RTX 3080 AIB FLAWED Card's, Cheap Capacitor Arrays Prone to Failing Under Load! - 27th Sep 20
Boris Johnson Hits Coronavirus Panic Button Again, UK Accelerting Covid-19 Second Wave - 25th Sep 20
Precious Metals Trading Range Doing It’s Job to Confound Bulls and Bears Alike - 25th Sep 20
Gold and Silver Are Still Locked and Loaded… Don't be Out of Ammo - 25th Sep 20
Throwing the golden baby out with the covid bath water - Gold Wins - 25th Sep 20
A Look at the Perilous Psychology of Financial Market Bubbles - 25th Sep 20
Corona Strikes Back In Europe. Will It Boost Gold? - 25th Sep 20
How to Boost the Value of Your Home - 25th Sep 20
Key Time For Stock Markets: Bears Step Up or V-Shaped Bounce - 24th Sep 20
Five ways to recover the day after a good workout - 24th Sep 20
Global Stock Markets Break Hard To The Downside – Watch Support Levels - 23rd Sep 20
Beware of These Faulty “Inflation Protected” Investments - 23rd Sep 20
What’s Behind Dollar USDX Breakout? - 23rd Sep 20
Still More Room To Stock Market Downside In The Coming Weeks - 23rd Sep 20
Platinum And Palladium Set To Surge As Gold Breaks Higher - 23rd Sep 20
Key Gold Ratios to Other Markets - 23rd Sep 20
Watch Before Upgrading / Buying RTX 3000, RDNA2 - CPU vs GPU Bottlenecks - 23rd Sep 20
Online Elliott Wave Markets Trading Course Worth $129 for FREE! - 22nd Sep 20
Gold Price Overboughtness Risk - 22nd Sep 20
Central Banking Cartel Promises ZIRP Until at Least 2023 - 22nd Sep 20
Stock Market Correction Approaching Initial Objective - 22nd Sep 20
Silver Bulls Will Be Handsomely Rewarded - 21st Sep 20
Fed Will Not Hike Rates For Years. Gold Should Like It - 21st Sep 20
US Financial Market Forecasts and Elliott Wave Analysis Resources - 21st Sep 20
How to Avoid Currency Exchange Risk during COVID - 21st Sep 20
Crude Oil – A Slight Move Higher Has Not Reversed The Bearish Trend - 20th Sep 20
Do This Instead Of Trying To Find The “Next Amazon” - 20th Sep 20
5 Significant Benefits of the MT4 Trading Platform for Forex Traders - 20th Sep 20
A Warning of Economic Collapse - 20th Sep 20
The Connection Between Stocks and the Economy is not What Most Investors Think - 19th Sep 20
A Virus So Deadly, The Government Has to Test You to See If You Have It - 19th Sep 20
Will Lagarde and Mnuchin Push Gold Higher? - 19th Sep 20
RTX 3080 Mania, Ebay Scalpers Crazy Prices £62,000 Trollers Insane Bids for a £649 GPU! - 19th Sep 20
A Greater Economic Depression For The 21st Century - 19th Sep 20
The United Floor in Stocks - 19th Sep 20
Mobile Gaming Market Trends And The Expected Future Developments - 19th Sep 20
The S&P 500 appears ready to correct, and that is a good thing - 18th Sep 20
It’s Go Time for Gold Price! Next Stop $2,250 - 18th Sep 20
Forget AMD RDNA2 and Buy Nvidia RTX 3080 FE GPU's NOW Before Price - 18th Sep 20
Best Back to School / University Black Face Masks Quick and Easy from Amazon - 18th Sep 20
3 Types of Loans to Buy an Existing Business - 18th Sep 20
How to tell Budgie Gender, Male or Female Sex for Young and Mature Parakeets - 18th Sep 20
Fasten Your Seatbelts Stock Market Make Or Break – Big Trends Ahead - 17th Sep 20
Peak Financialism And Post-Capitalist Economics - 17th Sep 20
Challenges of Working from Home - 17th Sep 20
Sheffield Heading for Coronavirus Lockdown as Covid Deaths Pass 432 - 17th Sep 20
What Does this Valuable Gold Miners Indicator Say Now? - 16th Sep 20
President Trump and Crimes Against Humanity - 16th Sep 20
Slow Economic Recovery from CoronaVirus Unlikely to Impede Strong Demand for Metals - 16th Sep 20
Why the Knives Are Out for Trump’s Fed Critic Judy Shelton - 16th Sep 20
Operation Moonshot: Get Ready for Millions of New COVAIDS Positives in the UK! - 16th Sep 20
Stock Market Approaching Correction Objective - 15th Sep 20
Look at This Big Reminder of Dot.com Stock Market Mania - 15th Sep 20
Three Key Principles for Successful Disruption Investors - 15th Sep 20
Billionaire Hedge Fund Manager Warns of 10% Inflation - 15th Sep 20
Gold Price Reaches $2,000 Amid Dollar Depreciation - 15th Sep 20
GLD, IAU Big Gold ETF Buying MIA - 14th Sep 20
Why Bill Gates Is Betting Millions on Synthetic Biology - 14th Sep 20
Stock Market SPY Expectations For The Rest Of September - 14th Sep 20
Gold Price Gann Angle Update - 14th Sep 20
Stock Market Recovery from the Sharp Correction Goes On - 14th Sep 20
Is this the End of Capitalism? - 13th Sep 20
The Silver Big Prize - 13th Sep 20
U.S. Shares Plunged. Is Gold Next? - 13th Sep 20
Why Are 7,500 Oil Barrels Floating on this London Lake? - 13th Sep 20
Sheffield 432 Covid-19 Deaths, Last City Centre Shop Before Next Lockdown - 13th Sep 20
Biden or Trump Will Keep The Money Spigots Open - 13th Sep 20
Gold And Silver Up, Down, Sideways, Up - 13th Sep 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

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