These “Stealth” Fees Can Rob You Blind

Back in January, we told you about a Wall Street “solution” that’s actually more of a “problem” than anything else…

Wall Street markets it as the “value” exchange-traded fund (ETF).

If you value your money, you’ll want to stay away from this type of solution.

It’s supposed to offer a cheap and simple way to buy a basket of stocks. But as we showed you, value ETFs are way more expensive than they let on.

But the value ETF isn’t the only sand trap dotting the Wall Street landscape. There are plenty of others out there.

Step in one and it’ll slowly sink your portfolio. Our mission is to help you avoid these sand traps so you can grow your wealth… not lose it.

That’s why, today, we want to tell you about another Wall Street scheme you should be aware of.

Brokers bill it as a “safe” way to diversify your portfolio. But it’s really a stealthy way for them to line their pockets with more of your money.

Identifying this trap could be the difference between potentially retiring with a $1.5 million nest egg and retiring with a $2.2 million nest egg.

Beware of This Latest “Solution”

Wall Street calls this newest solution a “fund of closed-end funds (CEFs).”

That sounds like a mouthful. So let us explain how they work.

A closed-end fund is a mutual fund that has an initial public offering (IPO) of shares. Once those shares are sold, no additional shares are issued.

CEF shares trade on public stock exchanges. They generally consist of stocks that track an index, industry, or asset class.

We actually like CEFs and own several in our Palm Beach Letter portfolio.

They can offer broad exposure to a growing industry. (For example, in February, we bought a CEF that exposes us to the virtual reality trend. It’s up 9.4% since then.)

But our strategy is to buy the best ones at a discount.

What we don’t like are funds of CEFs.

These funds put several CEFs into a basket. So they give you even broader exposure to the market. Some of them can contain hundreds of stocks.

Think of them as a “mega CEF.”

Here’s why these things are so dangerous…

Mega-CEF Stealth Fees Are a Double Whammy

Showing you how to avoid stealthy fees may not be exciting… But it can make you more money than the next hot stock tip.

Here’s why…

Like mutual funds, closed-end funds charge a management fee. They average about 1% per year.

But these mega CEFs charge a management fee on top of the fees already charged by the individual CEFs they hold. It’s a double whammy.

These fees might seem small at first (0.5% to 1% per year). But they compound over time… and can eat away at your retirement nest egg.

Take the PowerShares CEF Income Composite ETF (PCEF). It is a mega CEF that charges 1% in fees.

Its biggest holding is the Eaton Vance Tax-Managed Global Diversified Equity Income Fund (EXG). EXG also charges a 1% fee.

If you buy PCEF, you’re paying both its 1% fee and the 1% fee charged by EXG. So your total fees are 2%.

The additional fee you pay to PCEF might seem small. But it compounds over time. Take a look at the chart below:

If you put $100,000 in both funds, after 40 years, you’d make $1.5 million with PCEF and $2.2 million with EXG. That’s a difference of $700,000.

How to Avoid This Sand Trap

You don’t need to own these mega CEFs to be diversified. An individual CEF will give you plenty of exposure.

Here’s a list of the six mega CEFs that trade in the U.S:

(*CEFL says its management fee is 0.5%. But it doesn’t disclose the fees it charges to hold its basket of CEFs. We dug into the numbers and estimated the true fee at 3%.)

If you own any of these funds, sell them. They’re a rip-off.

You can easily replace them with a lower-cost individual fund that tracks the industry or index you want to buy. And save yourself a lot of money doing so.

Regards,

Nick Rokke, CFA
Analyst, The Palm Beach Daily