Why We're Dodging These 3 Gold CEFs (Even With Gold Soaring)

Forbes

13 hours ago

A lump of gold on a stone floor
getty
Here's a surprise from a die-hard closed-end fund (CEF) fan like me: Sometimes CEFs aren't your best bet.
I'll admit, that's tough for me to say—especially when the average CEF yields a historically high 9.1%. (CEF yields are usually around 8.5%). That high yield partly reflects the fact that many CEFs are trading at steep discounts to their net asset value (NAV).
Translation: The fund is trading for less than what its underlying portfolio is worth. That, in turn, has resulted in lower prices among some CEFs, along with higher yields (as yields and prices move in opposite directions).
All of this simply means that CEFs are generally out of favor right now, which is an opportunity for us.
But not every CEF is ripe for buying. We especially want to avoid the three top performers among CEFs with market caps over $200 million: ASA Gold and Precious Metals (ASA), the Sprott Physical Gold Trust (PHYS) and the Sprott Physical Gold and Silver Trust (CEF).
The fact that these funds have booked strong runs this year shouldn't come as a surprise: They're all gold funds, and gold has taken off due to rising economic uncertainty (the usual fuel for the yellow metal).
Even so, as you can see, there are some clear differences in performance here, and those are worth unpacking.
Gold Funds
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Above we see that the Sprott Physical Gold and Silver Trust—with the somewhat confusing 'CEF' ticker, not to be confused with CEFs in general (in purple)—and PHYS (in blue) have similar returns to the benchmark SPDR Gold Shares (GLD) ETF (in green), at around 25%. Then there's ASA (in orange), which has more than doubled even the best of these three other funds.
There is some logic at work here. For starters, PHYS and GLD really should track each other, since they both devote almost 100% of their portfolios to physical gold (both own gold bars that are locked up in vaults), and both have similar expense ratios (0.4% for GLD, 0.41% for PHYS).
The lower performance of 'CEF' is also not surprising, given that the fund also holds silver, and the 'poor man's gold' hasn't done as well as its yellow counterpart this year.
ASA, however, is the clear outperformer. That's thanks in part to its ownership of several gold-mining stocks. Its largest position, G Mining Ventures Inc., a Canadian firm that explores for precious metals, has nearly doubled year to date.
ASA's fast short-term gain is, of course, great, but it's unlikely to last. Here's why.
Note that, if we go back to 2010, the year the last of these funds, PHYS, launched, we see that GLD (again in green) outran all three of the CEFs. This shows that CEFs were poor options in the case of gold. Moreover, ASA (again in orange) was actually the worst performer, returning just 53% over 15 years, and being in the red for most of that time.
ASA Underperforms
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In terms of key takeaways, there are a few here. First, if you want to hold gold, this is a rare case where an ETF, not a CEF, is the better choice.
Second, gold is not a great play for income, given that the highest yielder among these funds is ASA, with a puny 0.2%.
Third, gold itself is a poor play for the long term, no matter how you invest in it. To see why, all we need to do is splice the S&P 500's performance (in pink below) into that last chart.
Gold Underperforms
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It doesn't get much clearer than that!
This, however, is where the good news ends for ETF investors. Because when it comes to investing in stocks (or pretty well any other asset class, for that matter), you're far better off with CEFs.
Let's take a look at the Adams Diversified Equity Fund (ADX), a CEF we've held in my CEF Insider service since its earliest days: We bought ADX in July 2017, just a few months after CEF Insider's launch.
Here's how the fund—current yield: 9% (and in orange below)—has done since, as compared to the S&P 500 index fund SPDR S&P 500 ETF Trust (SPY), in purple, with dividends reinvested:
ADX Outperforms
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This chart says it all: CEFs like ADX can crush the S&P 500 and pay us generously while doing so. Plus they give us access to top-notch management and upside-generating discounts to NAV, too. Those are strengths no index fund can match.
Michael Foster is the Lead Research Analyst for Contrarian Outlook. For more great income ideas, click here for our latest report 'Indestructible Income: 5 Bargain Funds with Steady 10% Dividends.'
Disclosure: none