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Summary The 2015 market correction caused a 10% drop across the market, but some CEFs were unaffected. Investing in market-neutral CEFs can help you protect your portfolio in the event of an event. I present a list of the 5 most profitable CEFs that are also uncorrelated to the general market. The previous market correction was a three-day selloff that led us to a market that trended sideways for two months. In total, the market lost 10% of its value before climbing back to its original place: (click to enlarge) Knowing not to freak out and to hold onto your investments is good, but having investments that are uncorrelated to the general market in the first place is better. This article is a follow-up to two other articles on investments uncorrelated to the S&P 500. The first article was on investment categories; the second on index funds. This article will be on CEFs, as per a reader request: (click to enlarge) Correlation In my previous article, I used a five-year lookback period. But if we are to really consider these investments uncorrelated to the market, they should not fall when the market does. Hence, the following comment: For this purpose, in this article, I will only be looking at the most recent market correction as my lookback duration. Thus, the correlation calculation will be from August to November, 2015. Whenever we look at the correlation of two investment instruments, we must use the log of those investments. In this way, we find the correlation of returns, not simply price movement. The result will tell us whether two investments are likely to give the same returns over our lookback period. I wrote some R code to screen CEFs according to the following criteria: Trading above $5 (therefore not a penny stock). Has a correlation of less than 0.3 (in magnitude) to the SPDR S&P500 Select ETF (NYSEARCA: SPY ). I then arranged those CEFs in order of greatest return over the past year. I chose the top five CEFs in this list to present to you. Because the top five actually had 3 municipal bond CEFs, I went down the list to add 2 more CEFs outside of this category. The Winners Nuveen Long/Short Commodity TR (NYSEMKT: CTF ) This CEF is a portfolio of long and short futures contracts. CTF purposefully plays a flat game, not taking too many long or short positions. Though it would have been nice to see CTF short energy, making their shareholders lots of cash over the past couple years, CTF has avoided such high-volatility trades. Though CTF’s Nav growth is rather slow, dipping into negative territory, this CEF is trading at a decent discount: -4.36%. The yield is currently 7.54%. Whether CTF can maintain these payouts at its current Nav growth is questionable. The discount is disappearing, however. The discount bottomed out at over -20% in 2014 and has recently bounced back. Thus, if you’re interested in getting in on this high-yield CEF, you should consider doing it soon. Remarkably, CTF is the only CEF in the top five that is not a bond-based fund. Correlation with market-correction phase SPY: 0.27 Babson Capital Corporate Invs (NYSE: MCI ) Here, the focus is on non-investment grade corporate debt. The equities involved are conversion rights, preferred shares, and warrants. Because of the inclusion of conversion rights, the debt here is convertible, which can lead to a dilution of shares. Nevertheless, the yield is high, at 6.80%. However, the surge in price has caused MCI to outgrow its Nav. The Nav sits at a stable 14.70, while the CEF trades at over $17. This CEF is selling at a 10.82% premium. If you buy this CEF, you will be overpaying for the portfolio. But for a long-term investment, MCI seems to provide noteworthy returns. Correlation with market-correction phase SPY: 0.19 Municipal Bond CEFs EV NJ Municipal Bond (NYSEMKT: EMJ ) Blackrock VA Municipal Bond (NYSEMKT: BHV ) Blackrock Muniyield Arizona (NYSEMKT: MZA ) These CEFs offer generous distribution rates of around 5.00. Both BHV and MZA trade at a premium, while EMJ trades at a slight discount. That discount is soon to be gone, as it has been shrinking over the past year. Buying a municipal bond fund can especially benefit you via tax exemptions if you live in a state with high taxes, as these bonds are tax-free investments in most cases. However, realize that EMJ will cause you to pay capital gains taxes on your investment, as it is currently trading at a discount. All of these regions – New Jersey, Virginia, and Arizona – are, to my knowledge, in good shape. But you should perform due diligence and ensure that the local governments aren’t facing problems of paying their debts. Residents in states with high taxes, such as New York, New Jersey, and California, should consider these CEFs. EMJ’s correlation with market-correction phase SPY: -0.09 BHV’s correlation with market-correction phase SPY: 0.25 MZA’s correlation with market-correction phase SPY: -0.11 Doubleline Opportunistic Credit (NYSE: DBL ) With a yield of 8.22, it’s no surprise that DBL isn’t trading at a discount. DBL has almost consistently been trading at a premium. But there have been dips into the discount region. An investor looking for a good deal might keep an eye on DBL and buy at one of these rare discounts. Just remember that a drop in the premium/discount will also typically drop the yield toward the sector’s average. In addition, as time goes on and rates increase, credit-based CEFs such as DBL will likely take a hit. You should also consider leverage here, as rates will likely be rising in the future. Higher leverage implies higher borrowing fees for the fund. DBL might be a good short-term hold, but you should consider dropping it for non-credit CEFs with less leverage before rates rise. Correlation with market-correction phase SPY: 0.02 Strategic Global Income (NYSE: SGL ) Speaking of leverage, here’s a non-leveraged CEF. Previously trading at one hell of a discount, SGL is now trading at “only” a -4.12% discount. This offers the highest discount of all the market-neutral CEFs we looked at today, with a yield of 9.42%. As the name suggests, SGL invests in global bonds. Its holdings branch from Argentina to Russia. These bonds are diversified, with both sovereign paper and corporate notes in the mix. Although a portfolio of such a wide geographical array of holdings is more likely than a focused portfolio to encounter a holding that cannot repay its debt, the fact that SGL is diversified should minimize such problems. The risk is there, but the reward is higher, I believe. This fund doesn’t have many downsides other than the exposure to iffy countries (the average credit rating of SGL’s holdings is still A) and the fact that SGL is taxable. Correlation with market-correction phase SPY: 0.11 Conclusion Overall, we have a wide selection of market-neutral CEFs that can help us generate stable income even during a market correction or crash. Of the five we looked at, I would recommend SGL most to investors in low-tax states, while recommending the municipal bond CEFs to investors in high-tax states. But no matter your choice, rest assured that these CEFs will be least affected by another market correction. Obviously, I simply don’t have the time to cover every industry. While reading this article, you probably thought of at least one investment that should have gone in my “Winners” section. Let me know about it in the comments section below. 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