In the realm of spaghetti westerns, the regret of not discovering them sooner is a sentiment echoed by many; a sentiment one might feel about the tech wonders of 2023. The “Magnificent Seven” – Alphabet (GOOGL), Amazon.com (AMZN), Apple (AAPL), Meta Platforms (META), Microsoft (MSFT), NVIDIA Corp. (NVDA), and Tesla (TSLA) – bestowed investors with a fistful of dollars, collectively surging 75% on average and significantly contributing to the overall market gain.
The driving force behind this financial windfall is none other than artificial intelligence (AI), thrust into the limelight with the release of ChatGPT in November 2022. While acknowledging the hype surrounding AI, it’s asserted that tech stocks’ gains are somewhat restrained, especially when contemplating the potential value AI could bring to the economy.
McKinsey, a prominent research firm, predicts generative AI’s contribution to the U.S. GDP could range from $2.6 trillion to $4.1 trillion in the future. Despite the slightly ambiguous timeline and a broad range in these estimates, there’s a belief that the surge in AI-related stocks isn’t exaggerated.
A compelling reason to consider this surge sustainable is the fact that the S&P 500, despite the tech sector’s surge, has yet to reach its all-time high. Even though the benchmark index briefly surpassed previous records last week, these tech stocks, excluding NVIDIA, have only seen an average annualized gain of 8.8%, not significantly more than the tech sector as a whole.
It’s noteworthy that, without NVIDIA, these stocks are, on average, down due to Tesla’s substantial drop. Comparing this to the 11.6% return from the other 493 S&P 500 companies in 2023, it suggests that the market, inclusive of the tech sector, isn’t overbought.
The knee-jerk reaction might be to turn to popular options like the SPDR S&P 500 ETF Trust (SPY). However, closed-end fund (CEF) investors argue in favor of alternatives like the Gabelli Equity Trust (GAB), managed by renowned value investor Mario Gabelli. Holding S&P 500 stalwarts such as Mastercard (MA), Deere (DE), and Berkshire Hathaway (BRK.A), GAB offers an 11.7% yield, in stark contrast to SPY’s 1.4% dividend.
This preference for CEFs stems from their ability to provide dividends, NAV gains, and capitalizing on closing discounts to net asset value (NAV), driving their prices higher. GAB, currently trading at a 2% discount, may seem modest until considering its historical average premium of 7.9% over the last five years, reinforcing its appeal as an attractive investment option.