Montreal, Canada

ETFs, or exchange-traded funds, are the hottest thing since sliced bread for investors. Low fees, generally sufficient liquidity and the ability to outpace expensive actively-managed products have resulted in a boom for the sector over the last ten years. If you want to invest in a market then ETFs will give you low-cost exposure.

But should ETFs form the driving force of a portfolio?

ETFs usually trade along with the market they represent. Discounts to net asset value (NAV) are usually modest when they occur and, for the most part, provide the individual investor with the easiest way to participate in a trend.

Closed-end funds, however, which also trade on a stock exchange, offer a greater value-added bias in an environment marked by high valuations since world markets bottomed more than 12 months ago. Closed-end funds, unlike open-end funds, trade at a discount or a premium to their underlying NAV and, in most cases, offer great bargains for value investors when trading at deep discounts.

Discounts today are not as compelling compared to last year when just about everything was smashed to bits heading into March 2009.

The average U.S.-listed closed-end fund trades at a modest 0.8% discount to NAV as of March 26, according to Site-by-Site.com. But, prior to the lows last year, many closed-end funds traded at discounts exceeding 15-20%, meaning an investor could buy a dollars' worth of assets for just $0.85 to $0.80 cents on the dollar. Still, you can find great bargains in closed-end funds even at current levels. Check Barron's for weekly prices and discounts/premiums or The Wall Street Journal on Monday's.

So why would an investor purchase an ETF at face value when he could buy a closed-end fund representing the same investment strategy at a discount to NAV? Let me give you an example.

A veteran open position for the last several years in The Sovereign Individual and my Commodity Trend Alert service, ASA Limited, a closed-end fund, trades at an 11% discount to NAV compared to no discount at all for GDX, or the Market Vectors Gold Miners Index. Both funds, which invest in similar securities – mainly large-cap gold mining stocks – recovered sharply since the depths of the credit crisis.

Yet, if an investor wanted exposure to large-cap gold stocks now, I certainly wouldn't suggest GDX. Instead, an investor can buy ASA, a portfolio of great global mining companies, for just $0.89 cents on the dollar. Why would I want to buy an ETF instead at face value?

Closed-end funds occasionally trade at deep discounts because the sector harbors pricing and performance anomalies that are difficult to explain. There shouldn't be any discount at all for the same portfolios offered by an ETF and a closed-end fund -- all things being equal. Closed-end funds have been around in the United States for more than 75 years, yet most investors are barely familiar with these securities or the inherent values offered across many markets and sectors.

Even more exciting is the British equivalent, London-listed investment trusts.

The Scottish launched the first collective investment vehicle way back in 1864 and coined the term "investment trust." Today, more than 250 investment trusts actively trade on the LSE, or London Stock Exchange, and are denominated in sterling.

ETFs are great but shouldn't be the only investment class in a diversified portfolio, especially if the same assets can be purchased at a discount to net asset value in closed-end funds.