Harry Domash's Winning Investing

Closed-End-Funds for Weak Market

The market has been weak and many expect that trend to continue at least until the Fed says that it's done hiking interest rates

Nevertheless, as the saying goes; “there’s always a bull market somewhere.” The big question, of course, is “where?”

Currently, I see three market sectors worth considering for the balance of this year and the first half of 2024.

For starters, I’m guessing that energy stock prices, driven by rising crude oil prices, will continue moving up for at least another couple of months.

Already fast growing tech stocks, spurred by the just beginning “artificial intelligence” revolution should do well for the next year or so.

Finally, when interest rates stop moving up, and appear ready to drop, bonds will start moving up in price, increasing profits for existing bond holders.

Consider Closed-End-Funds

If you believe me, there are many ways you could take advantage of those trends. But today I’m going to suggest using Closed-End Funds, a topic I haven’t discussed for awhile. 

Closed-End Fund (CEFs) are similar to conventional mutual funds. The main difference is that, unlike conventional funds that create new shares as needed, CEFs typically only issue shares at the IPO. After that, the shares trade on the open market, just like stocks.

Many CEFs employ leverage, meaning that they borrow cash to increase returns. For instance, they might pay 2% to borrow funds that they then could invest to earn 4%. Using leverage often allows CEFs to outperform mutual funds and ETFs with similar portfolios.

There’s one more important difference to consider. While mutual funds and ETFs trade close to the per share value (net asset value or NAV) of their holdings, CEFs usually trade at premiums or discounts. Ideally, you’d like to stick with funds trading at discounts. However you’ll often have to pay a premium to get funds producing the best overall returns.

With all that in mind, here are three CEFs worth considering.

Three CEFs For This Market

Eagle Point Credit Company (ECC): Holds mostly below investment grade U.S.-based senior secured loans. It pays monthly dividends currently equating to 16.8% dividend yield. It has returned 12% year-to-date, 21% over the past 12 months, and averaged 29% annually over the past three years. It recently traded at a 9% (estimated) premium to its net asset value (NAV).

Pimco Energy & Tactical Credit Opportunities (NRGX): Holds energy sector stocks, Master Limited Partnerships (MLPs) and various types of debt. It pays quarterly dividends, currently equating to a 5.0% dividend yield. Pimco has returned 24% year-to-date, 38% over 12-months and averaged 51% annually over three years. It recently traded at a 12% discount to its NAV.

Columbia Seligman Premium Technology Growth (STK): Holds the fastest growing tech sector stocks. Biggest holdings include Apple (AAPL), Broadcom (AVGO), Microsoft (MSFT), Applied Materials (AMAT) and Alphabet. (GOOG). It pays quarterly dividends equating to a 6.8% yield. Columbia Seligman has returned 21% year-to-date, 27% over 12-months and averaged 21% annually over three years. It recently traded at a 3% premium to its NAV.

Those are my picks. But do your own research. The more you know about your funds, the better your results.

published 9/26/23

Questions or comments about this site: click here

Winning Investing

199 Quail Run Road  Aptos, CA 95003

(Aptos is 'the beach' for Silicon Valley)

(800) 276-7721    (831) 685-1932   

 Popular Dividend Detective Links
Free Cash Flow: Best & Worst Monthly Dividend Stocks
 Preferred Stocks Best Closed-End Funds

About Harry Domash

Click here to read a recent interview.