If you’re an income investor, one the few “free money” opportunities in the stock market is offering you a great deal.
This opportunity is with a unique investment vehicle… one few people know about. And that’s a shame… because financial insiders have used this vehicle for years to make great money.
This vehicle allows you to buy assets for less – sometimes much less – than their obvious net worth. Plus… it’s easy to buy these vehicles. Buying them won’t cost you any more time or money than buying a regular stock.
[ad#Google Adsense 336×280-IA]I’m talking about buying closed-end funds at a discount.
Right now, you can use closed-end funds to buy income-producing assets for less than their market price… and collect safe tax-free income.
Let me explain…
Basically, there are two types of funds available to general investors: open-end funds and closed-end funds.
Most of the funds folks are familiar with are open-end funds, like the traditional mutual funds you might own in a 401(k).
These funds issue as many shares as investors are willing to buy. As a result, the price you pay for a share of an open-end mutual fund is simply the total dollar value of the securities divided by the current number of shares outstanding.
The result is known as the “net asset value,” or NAV. Open-end funds always trade at their NAV.
Closed-end funds work differently. These funds issue a limited number of shares. If you want to buy these shares, you must go to the stock market where they trade, just like any other stock. As a result, the market values of closed-end funds fluctuate. They don’t necessarily reflect their NAV…
Closed-end funds sometimes trade at a discount to their NAV. When they do, it’s a “free money” opportunity. It’s like giving the bank teller 90 cents and getting back a dollar bill. The deeper the discount to NAV, the more money you can make as the fund returns to a more normal valuation.
And right now, there’s a good “free money” opportunity in municipal bonds.
As you may know, municipal bonds are loans made to state and municipal governments. To encourage folks to invest in government projects, interest received from “munis” is exempt from federal income tax and, in many cases, state and local income taxes. This makes them a great way to earn investment income… and keep it from the taxman.
But recent news of higher interest rates sent prices down on municipal bonds. Take the Invesco Insured Municipal Income Trust (IIM) for example…
Investors have overreacted to the bond market selloff, meaning IIM trades at a 6.1% discount to its NAV. That’s like buying a dollar for $0.94. Back in December, IIM was trading at a premium to its NAV. If the fund returns to a premium from here, that’s an easy 6% gain.
And because the fund’s price has fallen, the yield is higher. Two months ago, the fund yielded 5.8%. It now yields 6.3%. And remember, that’s tax-free. If you’re in the 28% income bracket, it’s like earning a taxable yield of 8.7%.
This is exactly the kind of situation I love to see in closed-end funds. We’re buying safe, income-paying assets at a big discount.
If you want to find more situations like this, there’s a great free website you can use. It’s www.CEFconnect.com. The CEF stands for “closed-end fund.” You can go there and view almost any screen you can imagine. You can sort by fund type, market cap, discount or premium to NAV, and a number of other variables.
I’ve been using this strategy for years, and it’s still one of my favorites. Buying closed-end funds at a discount is one of the few legitimate ways to make nearly risk-free money in the investment markets…
It’s the closest thing to free money you’ll find.
Here’s to our health, wealth, and a great retirement,
Dr. David Eifrig