Seeking Alpha
Debt, REITs, macro, ETF investing
Profile| Send Message|
( followers)  

Summary

  • With CEFL trading at $27.72 and the net asset value of CEFL at 27.7142, the effective intrinsic value of the 30 components could be considered to be $28.98.
  • The 30% increase in MORL and the increase in the price of many of the mREITs was mostly the result of the convergence between the NAV and market prices.
  • On a monthly compounded basis, the effective annualized yield on CEFL is 18%.

UBS ETRACS Monthly Pay 2x Leveraged Closed-End Fund ETN (NYSEARCA:CEFL) yields 18% on a monthly compounded basis. The index upon which it is based contains 30 closed-end funds. The components of the index are selected and weighted based on a formula based on three factors: yield; share price discount from net asset value; and trading liquidity, with the 30 highest-ranking funds included in the Index.

As I indicted in 17.8%-Yielding CEFL - Diversification On Top Of Diversification, Or Fees On Top Of Fees? only 3 of the 30 components are trading at a premium to net asset value while the other 27 are at discounts. However, one of the three at premiums, PIMCO High Income Fund (NYSE:PHK), the second largest component by weight, is at a whopping 53.9% premium. The table below shows the premium/discount for each of the 30 components for the latest day at which price and net asset value is available. In most cases that is for April 2, 2014. For a few it was April 3, 2014.

The average discount for the 30 closed-end funds is 5.32%. On a weighted average basis, the average discount for the 30 closed-end funds is 4.37%. Thus, on April 2, 2014 with CEFL trading at $27.72 and the net asset value of CEFL at 27.7142, the effective intrinsic value of the 30 components could be considered to be $28.98. This is computed by dividing the net asset value of CEFL by the ratio of the weighted average net asset value to price of each of the components.

The table also shows the weight that each component contributes to the premium or discount. Thus, PHK because of its enormous premium contributes or rather detracts 2.35% to the weighted average discount of 4.37%. This means that without PHK, weighted average discount for the 30 closed-end funds would 6.72%.

The 30% increase in the price of ETRACS Monthly Pay 2x Leveraged Mortgage REIT ETN (NYSEARCA:MORL) since the low on December 6, 2013 and the increase in the price of many of the mREITs that comprise the index that MORL is based on, was mostly the result of the convergence between the average net asset value and market price of the mREITs. When the mREITs in MORL and Market Vectors Mortgage REIT ETF (NYSEARCA:MORT) were selling at sharp discounts to net asset value, this presented an opportunity as I indicated in: mREITs Trading At Steep Discounts To Book Value Violates Efficient Market Theory.

The premiums or discounts to net asset value of the mREITs that comprise the index that MORL and MORT are based on, are not available in a very timely basis as is the case with the 30 closed-end funds that CEFL and YieldShares High Income ETF (NYSEARCA:YYY) are based on. YYY is based on the same ISE High Income™ Index as CEFL but without the 2X leverage. For individual mREITs, the net asset value or book value is usually only available when they release their quarterly reports. For the 30 closed-end funds, the net asset value is computed daily.

As I indicated in 18% Yield On CEFL After April Dividend Increase, the $0.5941 April 2014 CEFL dividend results in a total of the dividends for the most recent three months of $1.1552; this is a 16.7% simple annualized yield with CEFL priced at $27.71. On a monthly compounded basis, the effective annualized yield is 18%.

If someone thought that over the next five years credit conditions would remain relatively stable and thus CEFL would continue to yield 18% on a compounded basis, the return on a strategy of reinvesting all dividends would be enormous. An investment of $100,000 would be worth $226,399 in five years. More interestingly, for those investing for future income, the income from the initial $100,000 would increase from the $17,800 initial annual rate to $40,299 annually.

4/2/2014

4/2/2014

prem/

weighted

wgt

price

NAV

discount

prem/disc

GGN

GAMCO Global Gold, Natural Resources & Income Trust

4.68%

10.03

10.31

-2.72%

-0.13%

PHK

PIMCO High Income Fund

4.35%

12.59

8.18

53.91%

2.35%

IGD

ING Global Equity Dividend & Premium Opportunity Fund

4.25%

9.14

10.11

-9.59%

-0.41%

BCX

BlackRock Resources & Commodities Strategy Trust

4.22%

11.67

13.56

-13.94%

-0.59%

BGY

BlackRock International Growth & Income Trust

4.21%

8.14

9.07

-10.25%

-0.43%

MIN

MFS® Intermediate Income Fund

4.19%

5.2

5.62

-7.47%

-0.31%

ETY

Eaton Vance Tax-Managed Diversified Equity Income Fund

4.18%

11.07

12.26

-9.71%

-0.41%

NFJ

AllianzGI NFJ Dividend Interest & Premium Strategy Fund

4.18%

18.19

18.56

-1.99%

-0.08%

ETV

Eaton Vance Tax-Managed Buy-Write Opportunities Fund

4.16%

14.29

14.78

-3.32%

-0.14%

AOD

Alpine Total Dynamic Dividend Fund

4.15%

8.5

10

-15.00%

-0.62%

EXG

Eaton Vance Tax-Managed Global Diversified Equity Income Fund

4.15%

10.09

11

-8.27%

-0.34%

BOE

BlackRock Global Opportunities Equity Trust

4.10%

14.84

16.92

-12.29%

-0.50%

ETJ

Eaton Vance Risk-Managed Diversified Equity Income Fund

4.10%

11.4

12.58

-9.38%

-0.38%

ETW

Eaton Vance Tax-Managed Global Buy-Write Opportunities Fund

4.10%

12.12

13.11

-7.55%

-0.31%

GAB

Gabelli Equity Trust

4.08%

7.73

7.19

7.51%

0.31%

JGT

Nuveen Diversified Currency Opportunities Fund

3.98%

10.5

12.33

-14.84%

-0.59%

PTY

PIMCO Corporate and Income Opportunity Fund

3.82%

18.14

15.25

18.95%

0.72%

BIT

Blackrock Multi-Sector Income Trust

3.57%

17.79

19.87

-10.47%

-0.37%

BTZ

BlackRock Credit Allocation Income Trust

3.32%

13.58

15.31

-11.30%

-0.38%

FFC

Flaherty & Crumrine Preferred Securities Income Fund

3.12%

19.41

18.97

2.32%

0.07%

ESD

Western Asset Emerging Markets Debt Fund Inc

3.00%

17.37

19.47

-10.79%

-0.32%

LDP

Cohen & Steers Limited Duration Preferred and Income Fund, Inc

2.80%

23.87

26.44

-9.72%

-0.27%

EVV

Eaton Vance Limited Duration Income Fund

2.40%

15.25

16.6

-8.13%

-0.20%

JSN

Nuveen Equity Premium Opportunity Fund

2.13%

12.63

13.63

-7.34%

-0.16%

CII

BlackRock Enhanced Capital and Income Fund Inc

1.98%

13.93

15.54

-10.36%

-0.21%

BCF

BlackRock Real Asset Equity Trust

1.81%

8.95

10.18

-12.08%

-0.22%

FAX

Aberdeen Asia-Pacific Income Fund Inc

1.60%

6.09

6.7

-9.10%

-0.15%

BDJ

BlackRock Enhanced Equity Dividend Fund

1.31%

7.95

9.13

-12.92%

-0.17%

PFN

PIMCO Floating Rate Strategy Fund

1.15%

10.33

10.54

-1.99%

-0.02%

ERC

Wells Fargo Advantage Multi-Sector Income Fund

0.93%

14.46

16.36

-11.61%

-0.11%

Source: 18% Yielding CEFL Trading At A Discount To Effective Intrinsic Value