The Best Way to Invest in Utilities

Stock quotes in this article: IDU  

A closed-end fund proponent might characterize UTG's 13% discount to NAV as relatively narrow. Over the past two years, the fund's discount has hovered in the low- to mid-teens. Of course, the discount could narrow or widen. However, it is most likely to stay about where it is.

It's certainly unlikely that UTG's discount to NAV will narrow when investors are so nervous about the broader stock market.

I believe a buy-and-hold investor who would rather not pick individual stocks in a particular sector is better off with an ETF than a closed-end fund. Anyone willing to game movements in a closed-end fund's premium or discount to NAV would probably want to rotate between closed-end funds and ETFs as his or her perception of market conditions changes.

Investment products will continue to evolve. The point of this article is to isolate a structural difference between two products. As you make investment decisions for your own portfolio, you should be open to exploring all products and buy the one that makes the most sense to you. It does not make sense that any one type of product could be the best way to capture every segment of the market.

Innovations in both types of investment products should eventually make it possible to access an investment strategy like UTGs without worrying about big swings in the discount to NAV.

At some point, ETFs will be actively managed, allowing them to pursue this kind of strategy, as opposed to tracking an index.


A Persistent Discount
Reaves Utility Income Trust has traded below its NAV for much of the past two years.

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At the time of publication, a client of Nusbaum's was long IDU, although positions may change at any time.

Roger Nusbaum is a portfolio manager with Your Source Financial of Phoenix, and the author of Random Roger's Big Picture Blog. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Nusbaum appreciates your feedback; click here to send him an email.





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