How to Get Bullish Physical Assets with an Edge Using Closed End Funds

How to Get Bullish Physical Assets with an Edge Using Closed End Funds

As retail traders, we’re always looking for an edge.  If we can develop an opinion or view and then find an edge, we increase the likelihood that we’re successful and make money.  If we don’t, we’re really just guessing, hoping we get lucky and make money (or not lose too much!).  Masters In Trading is bullish physical assets such as metals, agriculturals and energies for several reasons:

  • Inflation is at levels not seen in almost 40 years
  • Increased demand driven by:
    • government stimulus
    • supply chain issues
    • the re-opening of the world’s economies
    • the changing nature of the world’s economy as technology and “green” industries accelerate
  • Geopolitical uncertainty
  • Relative value

The first three factors are pretty self-explanatory.  Let’s take dig a little deeper into Relative Value.  Here’s the S & P 500 vs. Gold vs. Silver over the last 10 years using Masters In Trading Futures EDGE web-based charting platform:

What do you notice?  A bullish case for metals – Gold and Silver are inexpensive relative to equities.  Over the last 10 years, the S & P has moved up considerably, Gold is basically flat, and Silver is actually lower.

If we’re bullish physical assets, how can get we express that opinion with an edge?  One often overlooked answer is with Close End Funds (CF).

What’s a Closed End Fund

Most of us are familiar with standard, open end mutual funds where the mutual fund sponsor or investment manager buys shares from investors or sells shares to investors each day at the closing net asset value (NAV).  The NAV is simply the total value of the fund’s net assets (total investments less any debt) divided by the outstanding shares.  There is not a fixed number of shares; the sponsor will continue to issue shares no matter how many investors wish to buy and will always buy back all the shares that investors seek to sell.

CFs operate differently.  The total number of shares available is determined at the launch of the fund (the IPO) and is fixed for the life of the fund – no new shares can be issued, or any shares retired.  Shares are bought and sold on national exchanges throughout the day – investors trade with one another, not the mutual fund sponsor.  Like for any stock, CFs trade at prices determined by supply and demand, not by the NAV.  CFs can trade at a premium, where the price is higher than the NAV, or they can trade at a discount, where the price is less than the NAV.  If the NAV is $10 and the CF is trading for $9.00, the CF is trading at a 10% discount.  A CF may trade at a discount or premium for a variety of reasons:  the impact of mutual fund fees, the fund’s investment focus or the investment manager may be in favor, the fund may or may not be shareholder friendly or due to supply and demand factors.

How Do Closed End Funds Have Edge

This discount or premium can be an edge for the retail trader, a type of arbitrage or trade driven by the Relative Value concept.  For example, if the discount to NAV is relatively high (based on the CF’s price history), and we’re bullish the fund’s investment focus, it may be a good time to buy the fund.  For example, if we’re bullish metals, we’re looking for a CF that invests in Gold, Silver, etc. and is trading at an historically high discount.  Our edge comes from having two opportunities to profit: first, as the underlying metals increase in value, the CF will increase in value, and second, the CF will increase in price on a relative basis as the discount returns to more average levels. For example, let’s say we buy a CF that invests in Silver.  The fund’s NAV is $10, and it is trading at a 15% discount or $8.50.  Also assume that the historical discount is 5%.  If Silver rallies 20% and the discount returns to historical levels, we get a double whammy, we expect the CEF’s price to increase by about 20% based on Silver’s rally and the CF’s price would increase by another 10% as the discount returns to more normal levels – quite the edge.

Closed End Fund Opportunities with an Edge

There are two CF’s that invest in physical assets that enable an investor to express a bullish opinion on physical assets with an edge.  The first is $CEF.  $CEF invests primarily in Gold and Silver; as of January 31st, 66% of the funds’ assets were invested in Gold and 34% in Silver.  As you can see by the chart below, the fund is currently trading at the higher end of its 3-year discount (price vs. NAV) range, just the edge we’re looking for:

The second is $BGR.  $BGR invests primarily in energy and natural resources companies.  As you can see by the chart below, the fund is currently trading at the higher end of its 3-year discount (price discount vs. NAV) range, the edge we’re looking for:

Analyzing and trading Closed End Funds can be another source of a retail trader’s edge.  Masters In Trading has a premium workshop that focuses on Closed End Funds and how to spot opportunities like those identified above. Never traded CF’s before?  Paper trade, paper trade, paper trade!

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