Long term readers know I am a big fan of buying closed-end funds at discounts and selling them at parity. Closed-end funds are one of the least efficient areas of the market, and many can and do trade at very large discounts to their NAV. ETFconnect.com is a good resource here.
It was with great interest when a reader brought it to my attention that there is an ETN that invests in closed-end funds trading at a discount.
Fact Sheet for the underlying index here.
Ticker Symbol is GCE.
The average discount of the top 5 holdings is around -10%.
Cohen and Steers also has a closed-end FOF but it trades as a closed-end fund and can also trade at a discount (in effect getting a double dip). It got as low as about a -8% discount but is back to parity. Quant Investor had a nice article here.
—-
With the Dogs of the Dow on their way to their worst year ever, I wonder if it is a good time to put some money into the closed end fund that track the Dogs strategy (DSF) as it is trading at a -4% discount?
While we’re on the topic of dividends, why do you think Siegel uses them in his Wisdom Tree funds? From his very good book “Stocks for the Long Run”:
“But from a tax standpoint, share repurchases are superior to dividends.”
Sell Italian bonds. Italian public debt has reached a record high at 1646,7 billion euros.It is worse than 1992 when the country went very near to declare default(insolvency)
Doesn’t the CEF’s expense ratio need to be taken into account?
Take HIO, for example. According to etfconnect.com, HIO (which is a fixed-income CEF) was trading at a 13% discount to NAV as of 7/3/08. It’s current distribution rate is 10.27%. But it has an expense ratio of 0.88%, which means the underlying bonds’ distribution rate is 11.15%. Therefore, it seems to me that the fund ought to trade at a discount of 0.88/11.15 = 7.9% to NAV, to be equivalent to owning the underlying bonds without paying expenses. So I’d say HIO is a good deal at this price, but it’s more like a 5.1% good deal (13-7.9) rather than a 13% good deal.
anon,
The nav accounts for the mgmnt fee. All income and expenses are accrued daily for funds and are therefore included in the calculation of nav.
It should depend on the alpha of the fund. If they add less value than the expenses they charge it should trade at a discount and vice versa.
ANon 10:34/
Yes, but that doesn’t matter. When buying a stock you should be paying for future earnings not past earnings and expenses. Therefore, you need to deduct from NAV the NPV of expected net expenses to get a fair value. This means that open end funds are usually overvalued BTW (unless they have positive alpha in which case they are undervalued).
In addition you would need to add in your cost of carry till your spread converges to parity.