Safe Harbour: Closed End Bond Funds

Trend: Most closed-end funds are trading at a discount to the underlying securities.

Steve Christ at Wealth Daily describes closed-end funds and Safe Harbor Savings Accounts. Excerpts below. 

Note: Some municipal bonds may be hurt by uncertainty about the investment-grade ratings from the monoline insurance companies.

Link: Closed End Bond Funds

...closed-end funds issue a limited number of shares. That means the number of shares outstanding in them is fixed.   So closed end funds trade like a stock, bought or sold minute-by-minute with a price driven by market sentiment.

That's a key difference and why I say closed end funds can be bought on sale.

Here's why.

Because the market value of a closed end fund  share changes throughout the day, its price doesn't necessarily reflect the net asset value of its holdings. In fact, it rarely does.

As a result, share prices of these funds trade at either a discount or a premium to the securities underlying them. And when they trade at a discount to their NAV they have essentially gone on sale, taking some of the guess work out of buying them.

Now in "normal" conditions, the typical closed-end fund trades at anywhere from a 2 to 10 percent discount to its net asset value. However, in today's volatile environment of forced selling many these funds actually trade double-digit discounts now making them increasingly attractive investments.

Closed End Funds Meet Safe Harbor Savings Accounts

The most popular of these closed-end funds are those that invest in municipal bonds. They are the basis of what I call "Safe Harbor Savings Accounts." In them, you will find not only find a hefty yield, but very little risk.

But that's not the best part about these closed-end funds.

Better yet, the interest from "Safe Harbor Savings Accounts " is exempt from federal income tax and in many cases, state and local taxes as well. So they provide an income stream the boys in D.C. can't get their hands on unless you sell the bonds for a capital gain

That makes these ‘savings accounts" one of the easiest tax shelters on the market today—-especially now that they have hit the sales rack.

Consider, for instance, the Nuveen Insured Municipal Opportunity Fund (NIO:NYSE)

It is everything an investor could ask for these days. It pays a hefty yield and it's safe.

But even better than that is this: because it is a closed end fund it's currently on sale for an 11.77% discount. In other words, as of today, it will only cost investors, $11.17 to buy the underlying assets worth $12.66.

On top of that, this "savings account" pays a taxable equivalent yield of 8.80% for those buyers in the 28% tax bracket.

Just try to get that at a bank.

Of course, it is also a good bet that when the markets start to recover—and they will—that the discount on many closed-funds will return to "normal" levels. And when they do the share prices of these funds will rise right along with it.

That makes closed-end funds utilizing "Safe Harbor Savings Accounts" one of the best investments on the market today.