Invest(some) in Closed-End Funds (CEFs) !!!

There are many investors who would like to invest in foreign country stocks but do not want to take the risk of picking up individual stocks. This is a wise move since it is difficult to get complete information on many foreign stocks and also the there are many other unknown risks involved with individual companies. For these folks there are three choices by which they can buy a basket of stocks and reduce some risk involved.

These three options are: Exchange-Traded Funds (ETFs), Open-ended Mutual Funds and Closed-End funds(CEF)s.

Route #1: Open ended -MFs:
There are very few open ended mutual funds that are available to invest in a specific country. There many funds for a specific region such as the Asia-Pacific. But the problem with these regional focused funds is that they may heavily overweight in one country while having small exposure to other countries. For eg. – most of the Asian Pacific ones will have a heavy weightage in Japan. If an investor does not want to invest too much in Japan then this fund is not for them. So such investors can take the route of ETFs. But that may not be suitable for all investors as described below.

Route #2: ETFs:
While ETFs are great products due to their many advantages such as dynamic pricing, tax advantages etc. they are still fairly new to many folks. ETFs are bit complex for some folks to understand. Concepts like “creation units”, redemptions of units and the way ETFs operate can get tricky to understand. ETFs also encourage some folks to trade often which can wipe out any gains due to tax reasons.

So some investors totally avoid ETFs and stay with traditional products.

Route #3: Closed-End Funds (CEFs):
For those investors who do not like ETFs and those that are frustrated with the lack of country specific open ended MFs – there is a choice and that is the Closed Ended Funds (CEFs).

Country-Wise CEFs: There are many country specific CEFs to choose from. However there are not CEFs for all countries. For example, Argentina does not have one. The following ones are some of the country specific CEFs available to invest:

1. Japan Equity Fund – JEQ
2. Templeton Dragon Fund – TDF
3. New Germany Fund – GF
4. New Ireland Fund – IRL
5. Swiss Helvetia Fund – SWZ
6. The Korea Fund – KF, Korea Equity Fund – KEF
7. Chile Fund – CH
8. Mexico Equity and Income Fund –MXE, Mexco Fund – MXF
9. The China Fund – CHN
10. India Fund – IFN
11. Spain Fund – SNF
12. Thai Fund – TTF
13. Indonesia Fund – IF
14. Aberdeen Australia Equity Fund – IAF
15. First Israel Fund – ISL
16. Malaysia Fund – MAY
17. Singapore Fund – SGF
18. Taiwan Fund – TWN
19. Turkish Investment Fund – TKF

How should you choose a CEF?

Look for the following characteristics in your CEF selection:

  1. Consistent performance over time – at least 5 years. If you don’t want to review the performance numbers, at least check the charts.
  2. Good Yield – even if that’s a small rate
  3. Size of the fund – Go with higher asset size funds
  4. Fund Company – Choose companies with a long established records
  5. Unit price – Pick ones that are selling at a discount its NAV. Funds selling at a discount means they are cheaper – kinda like a “Sale” at a shop
  6. Expense Ratio – Avoid those that have high expense ratios.

There are many regional ETFs for Eastern Europe, Asia Pacific, Latin America etc. We will discuss those in a future post. Cheers !!!

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