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By Timothy Strauts | 04-16-2014 04:00 PM

Now's a Good Time to Consider Muni CEFs

Investors who can stomach some volatility should look at closed-end muni-bond funds, which are currently trading at substantial discounts.

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Tim Strauts: Closed-end municipal-bond funds could be an opportunity for investors willing to deal with above-average volatility. Most investors know that closed-end funds trade at premiums and discounts, and there can be a buying opportunity when a fund trades at a substantial discount. But just looking at discounts alone is not the way to buy closed-end funds. You need to look at the discount in relation to where it's average discount has been over time.

The way we measure this is use a statistic called Z-score. A Z-score of negative 1 is a buying opportunity, and positive 1 is usually a selling opportunity. And currently if you look at the municipal-bond space the average Z-score of the municipal-bond category is negative 1.2 as of April 15.

When looking at the chart historically, every period that the Z-score went below negative 1 has been a good entry point into municipal bonds. But it doesn’t mean that Z-Score can't go lower and further because in 2008 during the market panic it went as low as negative 5 for one day, but then quickly rebounded.

For an investor willing to deal with higher volatility, closed-end municipal-bond funds could be a good opportunity right now. 

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