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Summary

  • CEFL will soon declare a monthly dividend for June 2014. My calculations result in a projection of $0.3381 for the upcoming dividend announcement.
  • If one is willing to accept risks involved with the leverage and the possibility of buying near the top of the market, CEFL offers a compelling potential return.
  • If my projection of $0.3381 for the June dividend is correct, this would be a monthly compounded annualized yield of 18.1%.

UBS ETRACS Monthly Pay 2x Leveraged Closed-End Fund ETN (NYSEARCA:CEFL) will soon declare a monthly dividend for June 2014. There are 30 components that comprise the index upon which CEFL is based. As is shown in the table below, of those 30, there are 8 that pay dividends quarterly, while the other 22 pay dividends monthly. Only one of the 8 quarterly payers, BlackRock Global Opportunities Equity Trust (NYSE:BOE) went ex-dividend in May 2014. Thus, it will be the only one of the 8 included in the June 2014 CEFL monthly dividend.

The mix of monthly and quarterly dividends creates a "big month/small month" phenomena similar to that described in 30% Yielding MORL, MORT And The mREITs: A Real World Application And Test Of Modern Portfolio Theory. However, the phenomena is much less pronounced for CEFL than for ETRACS Monthly Pay 2x Leveraged Mortgage REIT ETN (NYSEARCA:MORL) since most of the components of MORL are quarterly payers.

In my projections, I assume that every monthly pay component will be included in every month's dividend. This is almost always the case. However, there may at times be some quirks of timing where that may not be the case. The procedure used to calculate a projection of the monthly dividend is to take the percent of the total assets in the basket that each of the components that will be included in the monthly dividend represent and compute an estimate for the number of shares it would account for, then multiply the shares by the dividend. Adding up the dividend dollar amounts and dividing by the shares outstanding gives an estimate of the dividend per share.

For example, GAMCO Global Gold, Natural Resources & Income Trust (NYSEMKT:GGN) accounts for 4.69% of the index as of May 23, 2014. Using 4.3 million CEFL shares outstanding and a share price of $10.55 for GGN, we can compute a share count of 1,108,000 shares for GGN based on $249.3 million assets for CEFL taking into account the 2x leverage. Multiplying the share count by the $0.09 monthly dividend for GGN results in a dollar value of $99,724. Adding up the dividend dollar amounts for each of the components that have ex-dates in May gives a total dividend amount of $1,454,006. Dividing by the shares outstanding gives an estimate of the dividend per share of $0.3381.

This is a 7.3% increase over the $0.315 dividend paid in March 2014. If my projection of $0.3381 for the June dividend is correct, the trailing three-month dividends would be $1.21. On an annual basis that is $4.84. This would be a simple yield of 16.7% based on the most recent three-months of dividends and a price of CEFL of $28.94. On a monthly compounded annual basis, the yield is 18.1%.

That is a fairly high yield for a well diversified instrument. As I pointed out in 17.8%-Yielding CEFL - Diversification On Top Of Diversification, Or Fees On Top Of Fees? since each of the 30 closed-end funds are themselves diversified, this is diversification on top of diversification. There are close to a thousand individual securities among the 30 components that make up the index upon which CEFL is based. There may be some duplicates, but that is still a tremendous amount of diversification. The individual closed-end funds vary greatly in terms of their portfolios. PIMCO High Income Fund (NYSE:PHK) consists primarily of bonds with many of its largest positions now municipal bonds. Gabelli Equity Trust (NYSE:GAB) contains primarily common stocks. The largest component by weight of CEFL is GGN, which earns income through an option strategy of writing (selling) covered call options on gold and natural resources equity securities in its portfolio.

The yield on CEFL is not as high as that on MORL. However, MORL has considerably more interest rate risk than CEFL. As I said in Federal Reserve Actually Propping Up Interest Rates: What This Means For mREITs, the real risk to a highly leveraged mortgage REIT is that short-term rates will rise. Higher short-term rates generally mean smaller spreads between what a leveraged mortgage REIT earns from its portfolio and the interest it pays to finance the securities bought with borrowed funds. When short-term rates get high enough, the yield curve can actually become inverted.

While some of the components of CEFL employ relatively small degrees of leverage and thus are somewhat exposed to interest rate risk, most of the mREITs in MORL employ leverage as high as 9 to 1. The high yields of CEFL and MORL come with the risks associated with the leverage. Furthermore, CEFL is correlated to the S&P 500 as was shown in 18% Yield On CEFL After April Dividend Increase, for the period since its inception, 70% of the variation in daily returns for CEFL can be explained by the daily variation in the S&P index. This is computed by a regression analysis using the daily returns of CEFL as a function of the daily returns on SPDR S&P 500 (NYSEARCA:SPY). Since SPY is close to an all-time high, there is the risk of buying at the top. Likewise, while long-term rates are up from their lows of last year, they are still at the lower end of historical ranges. Short-term rates are still near their all-time lows.

If one is willing to accept those risks, CEFL offers a compelling potential return. If someone thought that over the next five years market and credit conditions would remain relatively stable and thus CEFL would continue to yield 18.1% on a compounded basis, the return on a strategy of reinvesting all dividends would be enormous. An investment of $100,000 would be worth $229,464 in five years. More interestingly, for those investing for future income, the income from the initial $100,000 would increase from the $18,100 first year annual rate to $41,533 annually.

5/23/2014

CEFL

price

weight

ex-div

Pay date

div

freq

GGN

GAMCO Global Gold, Natural Resources & Income Trust

$10.55

4.69%

6/12/2014

6/23/2014

0.0900

m

PHK

PIMCO High Income Fund

$13.03

4.36%

5/12/2014

6/2/2014

0.1219

m

IGD

Voya Global Equity Dividend and Premium Opportunity Fund

$9.65

4.35%

5/12/2014

6/16/2014

0.076

m

ETV

Eaton Vance Tax-Managed Buy-Write Opportunities Fund

$14.85

4.24%

5/21/2014

5/30/2014

0.1108

m

NFJ

AllianzGI NFJ Dividend Interest & Premium Strategy Fund

$18.81

4.24%

3/13/2014

3/28/2014

0.4500

q

BCX

BlackRock Resources & Commodities Strategy Trust

$12.18

4.24%

3/12/2014

3/31/2014

0.2300

q

ETY

Eaton Vance Tax-Managed Diversified Equity Income Fund

$11.43

4.21%

5/21/2014

5/21/2014

0.0843

m

MIN

MFS® Intermediate Income Fund

$5.38

4.17%

5/13/2014

5/30/2014

0.0398

m

AOD

Alpine Total Dynamic Dividend Fund

$8.62

4.15%

6/19/2014

6/30/2014

0.0565

m

JGT

Nuveen Diversified Currency Opportunities Fund

$13.00

4.15%

3/12/2014

4/1/2014

0.2100

q

ETW

Eaton Vance Tax-Managed Global Buy-Write Opportunities Fund

$12.52

4.13%

5/21/2014

5/30/2014

0.0973

m

EXG

Eaton Vance Tax-Managed Global Diversified Equity Income Fund

$10.26

4.12%

5/21/2014

5/30/2014

0.0813

m

BOE

BlackRock Global Opportunities Equity Trust

$15.00

4.06%

5/13/2014

5/30/2014

0.3117

q

BGY

BlackRock International Growth & Income Trust

$8.12

4.06%

3/12/2014

3/31/2014

0.1700

q

ETJ

Eaton Vance Risk-Managed Diversified Equity Income Fund

$11.26

4.02%

5/21/2014

5/30/2014

0.0930

m

GAB

Gabelli Equity Trust

$7.62

3.94%

3/13/2024

3/12/2014

0.1500

q

PTY

PIMCO Corporate and Income Opportunity Fund

$18.71

3.79%

5/8/2014

6/2/2014

0.1300

m

BIT

Blackrock Multi-Sector Income Trust

$18.54

3.56%

5/13/2014

5/30/2014

0.1167

m

BTZ

BlackRock Credit Allocation Income Trust

$13.72

3.25%

5/13/2014

5/30/2014

0.0805

m

FFC

Flaherty & Crumrine Preferred Securities Income Fund

$20.12

3.09%

5/20/2014

5/30/2014

0.1360

m

ESD

Western Asset Emerging Markets Debt Fund Inc

$18.28

3.09%

5/21/2014

5/30/2014

0.1200

m

LDP

Cohen & Steers Limited Duration Preferred and Income Fund, Inc

$24.64

2.78%

5/14/2014

5/16/2014

0.1560

m

EVV

Eaton Vance Limited Duration Income Fund

$15.47

2.32%

5/8/2014

5/19/2014

0.1

m

JSN

Nuveen Equity Premium Opportunity Fund

$12.95

2.14%

3/12/2014

4/1/2014

0.254

q

CII

BlackRock Enhanced Capital and Income Fund Inc

$14.75

2.04%

3/12/2014

3/31/2014

0.3000

q

BCF

BlackRock Real Asset Equity Trust

$9.31

1.81%

3/12/2014

3/31/2014

0.1748

q

FAX

Aberdeen Asia-Pacific Income Fund Inc

$6.19

1.58%

5/19/2014

5/30/2014

0.035

m

BDJ

BlackRock Enhanced Equity Dividend Fund

$8.17

1.32%

3/14/2014

3/31/2014

0.14

q

PFN

PIMCO Floating Rate Strategy Fund

$10.91

1.17%

5/8/2014

5/12/2014

0.0800

m

ERC

Wells Fargo Advantage Multi-Sector Income Fund

$14.80

0.91%

6/12/2014

7/1/2014

0.1000

m

Source: Projected June Dividend For CEFL Will Bring Yield To 18.1%