Although most closed-end funds (CEFs) have been affected by the market volatility and credit crunch like exchange traded funds (ETFs), some CEFs might provide investors with buying opportunities.
Unlike ETFs, CEFs have a set number of shares. So, depending on investor demand or lack of demand, they can trade at above or below their net asset value (NAV). CEFs typically trade slightly below their NAV, but during the past few frantic weeks, the median discount for all CEFs widened to 6.5% as of Aug. 20, according to research firm Lipper Inc. These increased discounts are wonderful news for investors looking to use the market turbulence to their advantage. For example, the Lazard Global Total Return & Income Fund (LGI), which invests in stocks and foreign currency, is trading at a discount of about 12% to its NAV, reports Lyneka Little and Shefali Anand for the Wall Street Journal. However, the fund has 35% of its assets in foreign-currency and debt markets, which makes it a potentially risky investment.
Besides the benefit of some CEFs having larger-than-normal discounts, there’s also the chance that some smaller CEFs could liquidate or merge with open-end funds that don’t trade on an exchange. This also would be good news to investors because the liquidation must be done at the fund’s NAV, which is guaranteed to be higher than the current discount price of the fund. That translates into an instant windfall for investors.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.