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.
