Closed-End Funds: The Best Way To Play An Elevated Stock Market

September 13, 2014 Updated: April 23, 2016


  • Stock benchmarks at elevated levels offer limited potential for upside.
  • Closed-end funds create strong alternatives for those looking to gain stock exposure.
  • NAV discounts and elevated dividends support the outlook for CEN and JGT.

Stock markets have shown some pretty clear trends in the last few years, as the global economic recovery has given investors the confidence to move back into equities. These trends have been most apparent in developed markets, while we have seen some lagging in emerging Asia. But for those that are looking to gain some additional exposure to stocks in Europe or the US, there are limited opportunities to find value with prices at such elevated levels. Key examples here can be seen in the S&P 500 and the Dow Jones Industrial, which continue to grind forward and post record highs. Dips have been limited, and investing in these instruments at current levels creates unnecessary risk if tapered stimulus programs start to put downside pressure on stock markets.

Looking at Closed-End Funds

Given this economic environment, one of the best approaches is to consider investing in closed-end funds, which offer a limited number of shares and often trade at a discount when compared to net asset values (NAV). This is very different from the more commonly discussed mutual funds, which tend to trade in lock-step with their underlying asset values. What does this mean for investors? Opportunity. There are plenty of closed-end funds that offer long-term value and a heightened potential for returns. These days, this is not something that can be found in most areas of the market. Here, we will look at some of the best choices for newer investors that are looking to establish positions and gain added exposure to these sections of the market.

Two Fund Choices


Chart Source: Yahoo! Finance

One of the best opportunities in a closed-end fund can be found in the Center Coast MLP & Infrastructure Fund (NYSE:CEN), which is an excellent way of playing the expected rebound that is likely to unfold in energy markets. “The commodities space as a whole was under pressure for a good part of last year,” said Kris Alban, markets analyst at InvestingIQ. “But the improving global economy means overall demand will be rising in 2014.” This suggests much higher valuations going forward, and this creates a very positive earnings scenario for CEN. Most of the fund is made up of stocks in two key sectors: Master Limited Partnerships ((MLPs)) and energy infrastructure companies, so it will be important to watch quarterly earnings releases that deal with these areas.

The fund operates using well-balanced leverage ratios (roughly 26%), which should appeal to conservative investors that are still looking for the ability to make some leveraged gains. Most attractive is the fund’s 8.3% NAV discount, which means that you can buy $10 worth of assets for less than $9.20. CEN shows a market cap of more than $250 million and the potential to offer strong dividend payouts. CEN is an excellent choice for bullish investors looking for value in the current market environment.


Chart Source: Yahoo! Finance

Another strong option is the Nuveen Diversified Currency Opportunities Fund (NYSE:JGT), which is great for those looking for high dividends. The fund deals with high-yielding currencies, so gains in the fund will likely depend on the level of risk aversion that is present in the market. Perceived stability tends to bring support for high-yielding currencies, and since this is the environment we are currently seeing, there is little reason to expect major declines in JGT. The fund currently offers a dividend yield of 9.4%, and this is another favorable factor given the fact that we are still seeing low interest rates in most of the major world economies. JGT is also trading at a 16% NAV discount, so there is still significant value to be found in the fund. On the whole, these two closed-end funds offer some excellent risk-to-reward outlooks for investors looking to gain exposure to new asset classes.