Today we are going to dive into two closed funds (CEF) that have this everyone is looking for massive returns these days! Both pay over 8% on average and also tempt us with a big advantage, as they are far cheaper than most other CEFs.
Let’s stop there for a second and talk a bit about CEFs: this is a small group of funds known for their high returns (around 6.8% on average right now). They are similar to ETFs in that they are diversified, with each CEF typically buying hundreds of assets as part of a specific investment strategy.
Unlike ETFs, however, CEFs often trade for less than the actual market value of the fund’s assets. This is called the reset to net asset value. It’s easy to spot (most fund filters list it), and these discounts can make CEFs good deals when markets are overvalued.
Now let’s move on to our two cheap and generous CEFs. Both are well positioned to take advantage of the crude oil surge and “convert” those gains into more than 8% gains for us!
2 attractive energy games with an efficiency of 8%
We all know that oil has skyrocketed over the past 18 months as demand has increased since the early months of the COVID-19 crisis.
To get an idea of the magnitude of the oil flow, examine the performance of the ETF Energy Select Sector SPDR (XLE), a benchmark for the sector. While he typically owns slower-moving large-cap stocks, names like ExxonMobil (XOM), Chevron (CVX) and ConocoPhilips (COP) –XLE has delivered a strong performance of 58% over the past 18 months.
And this is only the energy fund managed by algorithm! See what our first CEF, the Kayne Anderson MLP / Midstream Investment Company (KYN), managed by one of the most savvy investment firms in the field of CEFs, has succeeded.
KYN focuses on Master Limited Partnerships (MLPs) that own oil and gas pipelines, including the biggest names in this space, such as Enterprise Products Partners (EPD), Energy Transfer LP (ET) and Western Midstream Partners LP (WES). (Many people avoid MLPs because they publish the complicated K-1 tax record to report your dividend income at tax time; buying through a CEF is a good way to avoid this – KYN publishes the much simpler 1099 form. )
It’s a bit more aggressive portfolio than the benchmark ETF, which is why KYN is up a hair more than XLE in the chart above. Another big difference? KYN returns 8.5%, compared to a measly 3.9% for XLE, so much of its return was in the form of cash dividends, not paper earnings.
Not only that, but KYN is inexpensive; trades at a 12.2% discount to net asset value, against XLE trading at par. (As mentioned, ETFs always trade at par, so there is never a deal here). KYN also gives you the opportunity to get outperformances and assets cheaply, cheaper than buying them directly. These two factors alone make this an almost irresistible option.
Which brings me to our second energy-CEF, the First Trust MLP and Energy Income Fund (FEI), which has a similar set of MLP’s in its major holdings (and similarly sends you the simpler Form 1099, instead of the accountant’s nightmare K-1 package). As of this writing, FEI is making 8.1% and while it hasn’t done as well as KYN in the past 18 months, it has still made investors a lot of money.
The appeal of FEI is that many of its energy investments have not paid off quite still. Main titles Magellan Midstream Partners (MMP) and Enterprise Products Partners are just as well positioned to profit from soaring oil prices as the assets of XLE or KYN (as mentioned, Enterprise is also a dominant position of KYN). So our investment with FEI would depend on the hope that it will catch up in the future and, as it does, outperform KYN and XLE over the next few months, just as KYN beat XLE and FEI in the past. latest some months.
Plus, the 7.4% FEI discount isn’t too bad, which again means we’re putting assets up for sale.
But should you buy?
While FEI and KYN are making over 8% and selling for less than they’re really worth, there’s a good reason to be careful: the story.
Since they’re still heavily pegged to oil prices, both funds have been going down over the past decade, even when you include dividends, as we’ve seen two major oil price collapses during that time period ( the latest being last year’s COVID plunge). So even if you to do buying KYN or FEI is the type of investment you need to buy and be ready to get out of it quickly.
That is why we will not add any of these funds to my official portfolio. CEF insider service. Frankly, they are more suited to multi-month trades (as you will find in the Dividend Swing Trader) that multi-year farms.
But if you’re bullish on oil for the short term, both are great ways to invest in that belief and get a a lot a greater income stream than if you bought the ETF or the energy stocks individually. In addition, you will also benefit from a discount!
Michael Foster is the Senior Research Analyst for Contrasting perspectives. For more great income ideas, click here for our latest report “Indestructible Income: 5 windfall funds with secure 7.3% dividends.“