By Michael Foster
The 2019 rebound has done a lot to revive most peopleaEURtms portfolios. But thereaEURtms a new trap you need to dodge as the market ticks up: the risk youaEURtmll stumble into an overbought stock (or fund).
But donaEURtmt take that to mean stocks are priceyaEUR"far from it! The S&P 500 is barely up from the start of 2018 and still far from its all-time highs, which is ridiculous when you consider last yearaEURtms near-20% earnings growth.
So itaEURtms pretty easy to see that stocks are still ripe for buying.
But there is one sector I am worried aboutaEUR"and it brings me to the first of 3 closed-end funds (CEFs) I want to warn you about today.
IaEURtmm talking about energy stocks, which have been on a tear so far this year, as you can see from the performance of the benchmark Energy Select Sector SPDR ETF ( XLE ) :
Energy Gets Ahead of Itself
Trouble is, that growth isnaEURtmt supported by earnings! In fact, profits in the sector have actually fallen nearly 6%, according to FactSet. And the CEF IaEURtmm going to tell you about now has actually run up even more than XLE, despite massively underperforming the market.
That would be the Tortoise Energy Independence Fund ( NDP ), which has soared a shocking 37% since the start of 2019. Investors holding this fund probably feel pretty smug about that gain, but they shouldnaEURtmt. While NDPaEURtms market price is up big, its NAV (or the value of its underlying portfolio) is up just 7.1%, a fair amount behind XLEaEURtms gain.
Snapshot of an Overbought Fund
The main reason for NDPaEURtms meteoric rise is classic yield chasing: many are enticed by this fundaEURtms astronomical 18.7% yield. But that is a mirage; not only has NDP cut its dividend massively throughout its history, but it is currently under-earning its dividend, which means yet another cut is coming soon.
The fund is also down on a total-return basis (so even when taking dividends into account!) since its inception, no thanks to the 2014 oil crash. But even before that, its returns were less than impressive:
A Perennial Money Loser
For this reason, NDP is my No. 1 must-sell CEF right now.
But itaEURtms not the only one to run away from. The PIMCO Global StocksPLUS & Income Fund ( PGP ) is a complex bond-and-derivatives fund whose market price has also run far ahead of its NAV, and not by a little, either! PGP has soared 24.5% in 2019, while its NAV is only up 4.5%:
PGP Steps Onto the Precipice
As a result, PGPaEURtms premium to NAV is now an absurd 56%, which means itaEURtms positioned for a crash anytime now.
If this sounds familiar, it should. IaEURtmve written about PGPaEURtms huge premium many times before, noting how easy it is to swing trade this fund for 40% annualized gains if you buy it when its premium gets too low and sell when its premium is too high. Right now weaEURtmre at a clear sell point, just like the one I spotlighted in August after recommending investors play PGP for a short-term trade in June . Investors who followed that advice bagged a 39% annualized return in less than three months.
Now weaEURtmre at a crest in the wave, so if you have PGP in your portfolio, this is the time to ditch it.
One more fund we need to be wary of: the Virtus Global Dividend & Income Fund ( ZTR ), which did something unusual just over a year ago: it traded at a premium for the first time ever.
A Suddenly Costly Fund
Although that premium disappeared during the recent market crashes, ZTR investors donaEURtmt care. TheyaEURtmre buying at a 5.1% premium for no good reason, since ZTR both underperforms its peers and the Vanguard Total World Stock Fund ( VT ) over the long haul.
Trailing the Market
Since ZTRaEURtms NAV is up a measly 4.2% in 2019, while its market price is up a shocking 18.6%, it is clearly overboughtaEUR"which means itaEURtms time to walk away.
HereaEURtms aA SAFE A 8.5% Cash Dividend for 2019
I donaEURtmt know why anyone would play around with looming disasters like ZTR, PGP and NDP when the CEF market continues to throw us bargain after bargain.
In fact, IaEURtmve got 18 of the very best deals in the space waiting for you now! As a group, these 18 retirement lifesavers throw offA an incredible 8.5% dividend!
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And remember, that 8.5% dividend is just an average.A One of these blockbuster funds yields an amazing 10.7% Another? 11.7%!
ThataEURtms not all, either, because you also get aEUR
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of NASDAQ, Inc.