Your Best Market Bargains
Never pay retail!
That is especially true when it comes to investing. I’m always on the lookout for bargains…
On Wall Street, true “bargains” are hard to find, especially with brokers and fund managers constantly hyping overpriced merchandise — including fees for this and commissions for that.
But there is one place in the market where you can truly find bargains and buy assets at steep discounts.
Where am I finding these bargains?
Closed-end funds, or CEFs.
What’s a Closed-End Fund?
Most folks are familiar with mutual funds, but few have owned a closed-end fund. CEFs have been around for decades and have attracted $260 billion of investor assets.
Closed-end funds are very similar to standard mutual funds in that they are professionally managed pools of money that anybody can invest in. CEFs are available in almost any investment category — stocks, bonds, international, real estate, natural resources — as well as targeted sectors, such as utilities and health care.
However, closed-end funds are in many ways more similar to exchange-traded funds (ETFs) than mutual funds.
Standard mutual funds are open-end funds. This means that they don’t have a limit on how many shares the fund can issue.
More importantly, when an investor sells his/her shares, the sponsoring fund company must liquidate some of its investments in order to pay off the redeeming investor.
Open-end funds don’t trade during the day. At the end of each trading day, the fund is priced based on the total value of the fund’s portfolio or the net asset value (NAV).
Just like traditional mutual funds, CEFs give you a stake in a large, professionally managed investment portfolio. However, instead of buying shares directly from the sponsoring company — such as T. Rowe Price, Fidelity or Vanguard — closed-end funds trade on the NYSE or Nasdaq just like stocks and ETFs.
CEFs have a fixed number of shares outstanding, and the value of the CEF shares is based on — but not directly tied to — the underlying net asset value (NAV).
I say “based” because the actual price of the fund’s shares is determined by the open-market forces of supply and demand.
NAV is the key to finding true bargains on Wall Street and buying top-quality merchandise at a discount.
Bargain Buying Opportunity
The difference between the share price of a closed-end fund and its NAV is the discount or premium.
Shares are said to trade at a “premium” when the market price is higher than the NAV. Call me cheap, but I’m not interested in paying $1.10 or $1.20 for a dollar’s worth of assets.
Remember, never pay retail, much less a premium to retail. That’s ridiculous.
Discounts, however, are a completely different story.
Shares are said to trade at a “discount” when the market price of the fund is lower than the NAV. Here’s an example:
Why do closed-end funds trade at a discount to NAV?
There are several reasons:
- Overall market volatility
- Recent performance
- Brand recognition of fund family
- An investment strategy that has fallen out of favor
- An asset class that is no longer popular.
But more often than not, it is simply the lack of investor awareness of closed-end funds, and that is why savvy investors can pay 90 cents, 80 cents or even less for $1.00 worth of assets. Bargain!
Even better is the possibility that the discount gap will narrow and you can capture extra capital appreciation on top of the fund’s investment return.
If you like to receive big, fat dividend checks — closed-end funds may be exactly what the doctor ordered. Especially if you stick to funds with experienced management at the helm with exceptional investment track records.
Buying top managed funds at a discount makes closed-end funds one of the best bargains on Wall Street today AND one of the highest-yielding investments you can find anywhere.
Here’s to growing your wealth,
Chief Income Expert, Mike Burnick’s Wealth Watch
Editor’s note: My colleague dropped a bombshell this morning.
This video details how a former Wall Street employer was caught misleading investors. The catch? You only have until midnight tonight to watch.
It’s just too controversial. Click here now to see it.