After a shaky open, stocks are up today as investors weigh what the Fed will announce at the next Federal Open Market Committee (FOMC), which is scheduled for Tuesday and Wednesday.
I expect the Fed will pause on any rate hikes this time around, but I do anticipate we'll hear some hawkish commentary regarding the remainder of the year, considering the August core CPI increased by 4.3%. Although this was down from 4.7% in the prior month, it remains well above the Fed's target of 2%. With inflation still above 4.0%, it's crucial to focus on income-producing investments for your portfolio.
As always, one of my favorite methods for generating income is through closed-end funds (CEFs), especially when two things are true: the fund is trading at a significant discount to its net asset value (NAV), and it's providing high yields.
This week, I'm watching the BlackRock Capital Allocation Term Trust (BCAT), a closed-end fund that invests in a portfolio of equity and debt securities. It also utilizes an option-writing (selling) strategy in an effort to generate current gains from option premiums and to enhance the trust's risk-adjusted return. The fund holds a basket of 849 positions, with an asset allocation of 56.01% in equities and the remainder in fixed income.
Regarding the sector breakdown, Information Technology, Healthcare, Financials, Consumer Discretionary, and Industrials comprise 10.76%, 7.89%, 7.57%, 7.33%, and 7.04%, respectively. In the company's Q2/2023 commentary, it noted that technology represented the sector with the largest increase over the quarter, focusing on enterprise software providers and companies that may benefit from the proliferation of artificial intelligence (AI). Within AI, exposure is centered on infrastructure providers positioned to power growth across open AI platforms.
Currently, 13.13% of the portfolio has been "overwritten", which represents the portion of the portfolio covered by written call options, used to enhance portfolio returns. Not only does BCAT hold a portfolio of publicly traded equities and fixed income, but it has also built its allocation of private investments to 11.3% (as of 6/30/2023) and expects long-run exposure to be around 25%.
This exposure to private investments makes BCAT interesting because it grants investors access to a market segment typically reserved for hedge funds, institutions, and high net-worth investors. At the current price, BCAT is not only trading at a significant -14.42% discount to its NAV, but it also delivers a massive 10.57% yield.
The post This Income Play Is a Perfect Hedge in a Sluggish Market appeared first on Total Wealth.
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.