Closed-End Funds Dive in Down Markets
A big reason for this is that they are an easy source of funds when the market is going down, and the psychology of fear in a downturn often causes an over-reaction on the part of the market. As a result, the market prices lose value faster than the NAV.
In the last couple of months, I have had quite a few emails and comments on my blog asking why some funds are down a lot more than others. In all of these questions, there was a lack of differentiation between closed-end funds and exchange-traded funds. ETFs don't have an issue with prolonged deviations between market price and net asset value.
When demand for an ETF increases, more shares are created, and when demand decreases, shares can be taken back in. In addition to the mechanics of ETFs, there are traders that arbitrage away small discounts and premiums when they occur.
None of this pertains to closed-end funds.This does not make closed-end funds a bad product. When the markets start to recover and act normally, it is a good bet that the discount on many funds will return to normal levels, which means at some point, CEFs become a good trade for more aggressive investors. The risk in going with Saut's picks now is not the management of the funds but whether the crisis is over. Equity markets are down 32% so far this year and just about every fixed-income market is under some form of distress. From here, an additional 20% drop is unlikely, but if that is what happens, I would expect the market price of many closed-end equity funds to do worse. Having the correct expectations is crucial to not making panicked decisions.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV