Navigating Closed-End Funds: Uncovering Bargains, Avoiding Disasters
Closed-end funds, which trade at prices that can deviate significantly from their asset value, offer potential bargains but also risks. While discounts on closed-end funds may seem appealing, they don't necessarily enhance returns unless the fund's portfolio is converted into cash. A formula combining discount, distribution rate, and expense ratio can help identify closed-end funds worth considering. Funds with negative cost of ownership, where distributions offset expenses, can be attractive. However, premium-priced funds with high expenses and lavish payouts should be avoided. Liquidations are rare, so it's important to assess whether the payouts and discount offset expenses before investing in a fund with high costs.
