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By Jeremy Glaser and Cara Esser, CFA | 05-07-2013 02:00 PM

Commodity Price Drop Creating CEF Bargains

The recent sell-off of gold and other commodities has led to advantageous discounts for precious-metals CEFs, but the funds should remain a small portion of your portfolio.

Jeremy Glaser: For Morningstar, I’m Jeremy Glaser. The recent fall in gold and other precious-metals prices has put a spotlight on commodity funds. I’m here with Cara Esser. She is a closed-end fund analyst. We are going to look at how closed-end funds that hold these precious metals have performed.

Cara, thanks for joining me.

Cara Esser: Thanks for having me.

Glaser: So, let’s get the broad overview. How many closed-end funds are there that track precious metals and track other commodities, and how are they generally structured?

Esser: There are five closed-end funds that track precious metals, in particular. And so they’ll either hold gold, silver, platinum, or palladium, or some combination of the metals themselves. And there are also two funds that invest in the equities of firms that are investing in commodities and natural resources and precious metals. So, if you are interested in the underlying equities as opposed to the actual commodities, there are two funds out there that do that, as well.

And it’s interesting to note that the largest closed-end fund in existence is a commodities closed-end fund. The ticker is CEF. It’s called the Central Fund of Canada, and it is a gold and silver fund.

Glaser: What are the fee structures on these? Why would you chose these over, say, GLD or one of the exchange-traded funds that track precious metals?

Esser: So the funds that track the precious metals themselves actually have very competitive fees related to the ETFs. Most of them are less than 50 basis points, and that’s right about in line with the ETFs.

Glaser: Then what are the distribution rates?

Esser: They generally do not have distribution rates. The exception being the equity funds that invest in the underlying equities of the firms--they do have distribution rates. But because the precious metals themselves are obviously not giving you any income, it’s unusual for a closed-end fund to have a 0% distribution rate, but none of these distributes any capital gains or income.

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