NTG, GUT, CLM: Sell These Three Funds Before They Blow Up Your Portfolio

I get to interact with hundreds to thousands of individual investors, and I have observed that many investors are not aware that shares of closed-end funds (CEFs) are not the same as common stock shares. CEFs are risky in a separate and distinct way from common stock risks.

CEFs attract new investors because many of them sport attractive yields and pay monthly dividends. Many don’t understand that these are funds that trade on the stock exchanges, and not shares of individual companies. Investors buy or sell CEF shares through the stock exchanges, the same as with common stock shares. Yet, these are not stock shares!

A CEF is a fund, similar to a mutual fund, except that after shares are issued, the fund sponsor will not redeem them for investors. Here are some of the CEF dangers to be aware of before you invest in one of these funds.

Many CEFs use leverage to boost returns.

The problem is that leverage cuts both ways, and when the market crashes as it did earlier this year, the leverage can destroy investor capital.

The Tortoise MLP Fund (NTG) shows how much leverage can hurt. This fund was about 40% leveraged in January 2020, with a split-adjusted share price of $115. The NTG shares now trade for $18.66—an 85% loss—and the leverage has skyrocketed to 75%.

For comparison, the Alerian MLP ETF (AMLP), which doesn’t use leverage, is down 40%, or half as much due to the pandemic-caused stock market crash.

CEF shares can trade at a premium or discount to NAV.

The net asset value (NAV) of a fund’s shares is the true or liquidation value of one share. Because CEF shares trade on the stock exchange, they can sell for more or less than NAV. While buying a CEF at a discount could be a benefit; to purchase shares with a big premium is a guaranteed money loser.

The popularity of the Gabelli Utility Trust (GUT) has this well-managed fund trading at a 99% premium to NAV. The premium means if you buy shares of GUT, you are paying almost $2.00 for $1.00 of assets. The only reason someone would pay double for an asset is that they don’t understand what they purchased. Stay away from CEFs trading at significant premiums to NAV.

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Disclaimer: The information contained in this article is neither an offer nor a recommendation to buy or sell any security, options on equities, or cryptocurrency. Investors Alley Corp. and its ...

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