Why closed-end funds are David’s favorite investment vehicle, particularly during market panics. What are the unique characteristics of these funds and what are successful strategies for investing in them?
Topics covered include:
- How closed-end funds differ from open-end mutual funds and ETFs.
- Why most closed-end funds are bond funds and use leverage.
- Why closed-end funds can sell at large discounts and premiums.
- What are managed distribution programs.
- How to evaluate and select closed-end funds.
- What is the Income Factory approach to closed-end fund investing.
Welcome to Money for the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I’m your host, David Stein. Today is episode 290. It’s titled, “What are Closed-End Funds and How to Invest in Them.”
Volatility clumps together
The stock market has been very volatile of late. Yesterday, global stocks fell over 7% and today they’re up to close to 5%. Volatility tends to clump together, just like if you’re on an airline flight, you hit some turbulence, it tends to be followed by more turbulence. In fact, that J.P. Morgan Retirement Guide, the study where they looked at the previous 20 years and showed the performance had you missed out on the 10 best days in the stock market, they pointed out that 6 out of the 10 best days were within 2 weeks of the 10 worst days. Volatility clumps.
When markets start selling off this severely, part of me gets kind of excited because I know that there will be bargains and the place that I invest, the vehicle that I invest, where I know I am getting a bargain are closed-end funds. Closed-end funds are commingled investment vehicles. There is a fund sponsor, your assets are pooled with other assets, and that fund sponsor invests.
Now there are publicly traded closed-end funds and there are private closed-end funds. We’re focused on the publicly-traded closed-end funds because the private closed-end funds. There isn’t a secondary market. There’s no way to get out of them, to sell your holdings unless the fund sponsor buys it back from you. Publicly traded means that there’s a secondary market, you can trade the closed-end funds.
Closed-end funds in the U.K. are called investment trusts. They’re known as listed investment companies in Australia. There are some characteristics. They, as I mentioned, they trade on an exchange, just like an ETF or a stock.
How closed-end funds work
Closed-end funds differ from open-end mutual funds…
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