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 Closed-End Funds for This Hot Market

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Closed-end funds (CEFs) often outperform conventional (open-end) mutual funds covering the same industry or market sector. Here's one reason why.

Unlike conventional (open-end) mutual funds that create new shares when you buy and redeem your existing shares when you sell, closed-end funds have a fixed number of shares that trade on the open market just like stocks.

That's an important distinction because many mutual fund investors add to their holdings in up markets and dump their shares in down markets. As a result, open end fund managers must deploy new cash in hot markets (buy high) and sell holdings in falling markets (sell low). But CEF managers don't face those issues.

Unlike mutual fund shares which always trade at the per-share value of their holdings, CEF share prices vary with supply and demand and typically trade at a discount (below) or premium (above) their net asset values. Although many trade at 5% to 10% discounts, funds focusing on currently hot categories trade at premiums.

Five CEFs for Strong Market

Here are five CEFs worth considering as long as the market and the economy continue to look strong. I picked them by defining sectors and industries that should outperform given current market conditions, and confined my selection to funds within those categories that pay significant dividends. That latter requirement is now feasible because many CEFs employ options trading strategies to generate income to pay dividends, even if they don't actually hold dividend-paying stocks.

From my candidate universe, I picked the first four funds listed based on five-year returns (price changes plus dividends), and the fifth based on 2017 returns. In all instances, I avoided adding funds that closely duplicated the holding of funds already selected. Here's the list.

John Hancock Financial Opportunities (BTO)

Portfolio holds mostly small U.S.-based financial stocks. Biggest holdings include JPMorgan Chase, PNC Financial Services, M&T Bank, Citizens Financial, and Cullen Frost Bankers. The fund returned only 13% last year, but 28% and 22%, on average, annually, over the past three- and five-years. Itís trading at a 2% premium to its NAV, and pays quarterly dividends equating to a 3.7% yield.

Columbia Seligman Premium Technology Growth (STK)

Holds only tech stocks, almost all based in the U.S. Biggest holdings: Lam Research, Micron Technology, Apple, Broadcom, and Qorvo. The fund returned 35% in 2017 and averaged 22% annual returns over both three and five years. Itís trading at a 6% premium to its NAV and pays quarterly dividends (8.0% yield).

Liberty All-Star Growth (ASG)

Holds stocks from all major sectors, except utilities, but overweights technology, consumer cyclical, industrials and healthcare. Biggest holdings: JB Hunt Transport, IPG Photonics, FirstService, Wayfair, and Visa. The fund returned 45% last year, and averaged 19 per cent and 18%, three and five year annual returns. Itís trading even with its NAV and pays quarterly dividends (8.2% yield). 

BlackRock Health Sciences (BME)

Holds only healthcare stocks, almost all based in the U.S. Biggest holdings include UnitedHealth Group, Medtronic, Pfizer, Celgene and Amgen. The fund returned 23% last year, and averaged 8% and 17% annually over the past three and five years. Itís trading at a 1% discount to its NAV and pays monthly distributions (6.6% yield).

Calamos Global Total Return (CGO)

Holds stocks and high-yield corporate bonds. US-based firms account for about half of the portfolio, Japan about 10%, and various European countries around 20%. Biggest holdings include Alibaba preferred stocks, and common stocks issued by Naspers, Alphabet (Google), Apple, FANUC and Bank of America . Calamos returned 57% in 2017, and averaged 18% and 12% annually, over three and five years. Itís trading at a 12% premium to its NAV and pays monthly dividends (7.8% yield).

As always, recent performance doesnít predict the future. Do your own research. The more you know about your funds, the better your results.

published 1/23/18

 

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