Closed-end funds (CEFs) often
outperform conventional (open-end)
mutual funds covering the same industry or market
sector. Here's one
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
(buy high) and sell holdings in falling markets
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
From my candidate universe, I picked the
first four funds listed
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.
It’s 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. It’s 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. It’s 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. It’s 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. It’s trading at a 12% premium
to its NAV and pays monthly dividends (7.8% yield).
As always, recent performance doesn’t predict the future. Do your
own research. The more you know about your funds, the better your