The recent artificial intelligence (AI) fervor has inadvertently created an opportune moment for shrewd investors to acquire undervalued technology stocks. While the hype surrounding Nvidia might tempt some, its inflated price warrants caution. Instead, focusing on technology-centric closed-end funds (CEFs) offers a compelling alternative, providing access to cutting-edge tech companies at discounted prices while generating substantial dividend income, often exceeding 6% annually. This approach capitalizes on the market’s overreaction to perceived threats, such as the emergence of Chinese AI competitors like DeepSeek, which triggered a sell-off in established tech stocks. This knee-jerk reaction presents a buying opportunity for investors willing to look beyond the immediate headlines and recognize the long-term potential of the technology sector.
The current market environment mirrors the pre-2022 bull market and the dot-com bubble era, characterized by high forward price-to-earnings ratios in the tech sector. However, instead of chasing overpriced individual stocks, exploring CEFs offers a more prudent strategy. These funds provide diversified exposure to a basket of tech companies, mitigating the risk associated with individual stock volatility. Furthermore, the closed-end structure of these funds allows them to trade at discounts or premiums to their net asset value (NAV), creating potential for enhanced returns. By purchasing these funds at a discount, investors effectively acquire a portfolio of tech assets for less than their intrinsic worth.
Columbia Seligman Premium Technology Growth Fund (STK) exemplifies a relatively conservative approach within the tech CEF space. Managed by a seasoned team with decades of experience, STK emphasizes a growth-at-a-reasonable-price (GARP) philosophy, focusing on companies with strong fundamentals and reasonable valuations. The fund’s portfolio consists of approximately 55 stocks, predominantly from the technology sector, with a smaller allocation to related industries like communication services and consumer discretionary. STK’s strategy resonates with a cautious approach, avoiding excessive leverage and focusing on sustainable growth. While its distribution rate of around 6% is attractive, it’s important to note that this yield is composed of a mix of income, return of capital, and capital gains, partially generated through a covered call options strategy.
BlackRock Innovation and Growth Term Trust (BIGZ), on the other hand, offers a more aggressive, high-yield approach. Targeting innovative mid- and small-cap companies, BIGZ seeks out companies with superior earnings growth potential. This fund incorporates private investments, offering access to opportunities not readily available in traditional markets. BIGZ employs minimal leverage and generates its substantial 13% distribution yield primarily through covered calls, historically comprised entirely of return of capital. The fund’s managed distribution plan mandates a 12% payout of its 12-month average NAV, ensuring a consistent income stream for investors. Recent efforts to address its persistent discount to NAV, including a share repurchase program, aim to enhance shareholder value.
Neuberger Berman Next Generation Connectivity Fund (NBXG) focuses on companies poised to benefit from the evolution of mobile network technology, including 5G and beyond. While its thematic focus initially centered on connectivity, the fund’s current holdings reflect a significant allocation to AI-related companies, like Nvidia, Taiwan Semiconductor, and Amazon, aligning it with the current tech trends. NBXG, similar to BIGZ, invests in private companies, adding an element of diversification and potential for higher returns. Its covered-call strategy contributes to its attractive 9.2% distribution rate. Despite temporarily lagging behind the broader tech sector, recent performance has been encouraging, surpassing the XLK technology ETF. The fund currently trades at a significant discount to NAV, providing an attractive entry point for investors.
In conclusion, while the AI hype has driven up valuations of some tech stocks to unsustainable levels, savvy investors can capitalize on market overreactions by exploring alternative investment vehicles like CEFs. These funds provide diversified exposure to the technology sector, often at discounted prices, while generating substantial income streams. The three highlighted CEFs – STK, BIGZ, and NBXG – offer varying levels of risk and return, catering to different investor profiles. STK represents a more conservative approach, focusing on established tech companies with reasonable valuations. BIGZ offers higher yield potential through its focus on smaller, rapidly growing companies and the use of covered calls. NBXG provides exposure to the evolving connectivity landscape, including AI-related opportunities, while also trading at a substantial discount. By carefully analyzing these options, investors can take advantage of the current market dynamics and build a robust tech portfolio positioned for long-term growth and income generation.
