This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Cramer's Action Alerts PLUS - See his portfolio and get alerts BEFORE every trade. Learn more NOW!

April Sours for Many Closed-End Funds

Will an April selloff bring May profits for closed-end fund buyers?

Tax-related selling, coupled with a spike in interest rates, caused closed-end fund prices to dip and discounts to widen last month. As a result, CEF analysts are advising investors to scoop up closed-end funds at depressed prices before they bounce back.

"Prices of CEFs in general started to weaken in mid-April, around the time that the yield on the 10-year Treasury surpassed the psychologically important 5% level," says Mariana Bush, closed-end fund analyst at Wachovia. "A few investors may have liquidated their CEF shares to raise cash ahead of the tax deadline. Others may have taken profits on their CEF shares bought in December when valuations cheapened substantially due to heavy tax-loss selling."

CEF shares are listed on securities exchanges, are actively managed and trade intraday on the open market. They typically trade in relation to, but independent of, their underlying net asset values, or NAVs. That means that unlike open-end mutual funds, shares of CEFs can trade at premiums or discounts to their underlying NAVs. Many CEFs also use leverage, which means they will be hurt by higher borrowing costs.

During the April selloff, CEF prices weakened, but their corresponding NAVs either remained stable or sank only slightly. Consequently, Bush says, discounts to NAVs have widened to the point where they may have stretched too far.

CEFs can trade at premiums, especially when a sector gets hot or a payout gets rich, but it's discounts, and the thought of them narrowing, that tend to attract CEF buyers. CEFs will trade at discounts to their NAVs for a number of reasons, the first and foremost being simple supply and demand.

"When there are more buyers than sellers, the premium goes up. Conversely, net sellers create discounts," says closed-end specialist Thomas Herzfeld, explaining what he calls an "obvious, but often ignored fact."

1 of 3

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Try it NOW
Only $9.95
Try it NOW
14-Days Free
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
BGR $20.40 0.29%
CRF $22.43 0.04%
GDV $21.09 -0.47%
MFD $16.12 0.12%
UTG $30.10 -0.53%


DOW 17,692.74 -83.38 -0.47%
S&P 500 2,058.27 -9.62 -0.47%
NASDAQ 4,863.1790 -37.7060 -0.77%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs