Navigating Trade Tensions with Closed-End Funds: A Steady Path to Income

The Anxiety of Market Volatility: Why You Don’t Have to Panic

Market volatility, fueled by escalating trade tensions, has left many investors on edge. The sharp swings in stock prices can be unsettling, especially for those relying on their investments for income. However, moments like these remind us why closed-end funds (CEFs) are such a valuable addition to a portfolio. The CEF Insider portfolio, for instance, focuses on funds that offer high, steady dividends—averaging over 10% across the portfolio. These payouts provide a sense of financial stability, allowing investors to collect income while waiting for the markets to stabilize.

The Strategic Advantage of Closed-End Funds

One of the most significant benefits of CEFs is their ability to shield investors from the emotional pitfalls of market volatility. Panic selling during downturns often leads to locking in losses, as seen in recent market swings. By holding onto CEFs, investors avoid this trap. Instead, they can ride out the turbulence, secure in the knowledge that their income stream remains intact. This strategy is particularly effective during times of uncertainty, such as the current trade tensions, where markets are prone to rapid reversals.

A 7.6% Dividend Built for Turbulent Times

Among the standout funds in this space is the Nuveen S&P 500 Dynamic Overwrite Fund (SPXX), which currently offers a compelling 7.6% dividend yield. SPXX is strategically designed to thrive in volatile markets by combining offense and defense. On the offensive side, the fund invests in S&P 500 heavyweights like Microsoft (MSFT), American Express (AXP), and Pfizer (PFE). On the defensive side, it employs a covered-call options strategy, which generates additional income when markets are uncertain.

How SPXX’s Strategy Works

The fund’s covered-call strategy works by selling options to other investors, giving them the right to buy SPXX’s stocks at a predetermined price in the future. If the stock price doesn’t reach that level—more likely during market corrections—the options expire worthless, and SPXX keeps the premiums it collected. These premiums add to the fund’s income, supporting its high dividend payout. This approach not only stabilizes returns but also capitalizes on market volatility, making SPXX a robust choice for income-focused investors.

Trade Tensions and Their Economic Impact

The recent escalation in trade tensions has created a ripple effect across global markets. For countries like Canada and Mexico, which rely heavily on exports to the U.S., the imposition of tariffs could lead to significant economic disruption. Canada, for instance, sends 77% of its exports to the U.S., while Mexico’s exports to its northern neighbor account for 78% of its total. Sectors such as automotive, energy, and agriculture are particularly vulnerable, which could lead to higher prices for consumers and potentially even a recession in these countries.

Why SPXX and Covered-Call Funds Shine in This Environment

Despite the uncertainties, the U.S. economy remains resilient, with GDP growth exceeding 3%, making a widespread recession unlikely. This juxtaposition of a jittery market and a strong economy creates an ideal environment for funds like SPXX. Since its coverage in late November, SPXX has returned approximately 5%, outperforming the flat S&P 500. Its discount to net asset value (NAV) has narrowed to 4.7%, and further investor interest could push this discount into a premium. With its 7.6% dividend and volatility-driven strategy, SPXX is a compelling option for investors seeking steady income and downside protection.

Conclusion: Steady Income in Uncertain Times

In times of heightened trade tensions and market volatility, funds like the Nuveen S&P 500 Dynamic Overwrite Fund (SPXX) offer a powerful combination of income generation and risk management. By focusing on high-quality CEFs, investors can avoid the pitfalls of panic selling and enjoy a steady income stream while waiting for markets to recover. For those seeking to bolster their portfolios with reliable dividends and a proven strategy, SPXX and similar funds are definitely worth considering.

Michael Foster is the Lead Research Analyst for Contrarian Outlook. For more income-generating ideas, check out our latest report: “Indestructible Income: 5 Bargain Funds with Steady 8.6% Dividends.”
Disclosure: None.