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Summary

  • I have projected a dividend for CEFL of $0.2998 for September 2014, and have included all of the intermediate numbers and calculations I used in arriving at that figure.
  • I have added some additional refinements to the calculation procedure to adjust the assets upon which the dividend calculation is based for the accrued fees and dividends of the components.
  • Based on my projections, CEFL will be yielding 18.4% on a monthly compounded basis.

The UBS ETRACS Monthly Pay 2x Leveraged Closed-End Fund ETN (NYSEARCA:CEFL) and YieldShares High Income ETF (NYSEARCA:YYY), which is based on the same index and thus has the same components as CEFL, but without the 2X leverage, will soon declare monthly dividends for September 2014. There are 30 closed-end funds that comprise the ISE High Income Index upon which CEFL and YYY 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. None of the 8 quarterly payers went ex-dividend in August 2014. Thus, they will not be included in the September 2014 CEFL monthly dividend calculation. It should be pointed out that one of the components, BlackRock Global Opportunities Equity Trust (NYSE:BOE) has switched from paying quarterly to paying monthly.

I have refined the procedure by which I calculate the projected dividend to make it more accurate. As some readers have noted, the exact weights of each of the components can change between August 15, 2014, the date that I am using for the calculation, and September 2, 2014, when the actual payment is determined. For the September 2014 dividend, payment will be based on the valuations on September 2, 2014 since the 30th of August is a Saturday and Monday, September 1, 2014 is labor day. Furthermore, an increase in the net asset value due to improvements in the market prices of the individual components will increase the dividend. This would occur even if there was no change in any of the dividends paid by any of the components. Likewise, a decrease in the net asset value due to declines in the market prices of the individual components will decrease the dividend. The relationship between the net asset value of a 2X leveraged ETN and the dividend is explained more fully in: "MORL's Net Asset Value Rises - Implications For The Dividends". Thus, there will always be some noise when predicting a dividend that will be based in part on market conditions a few weeks in the future.

Obviously, on August 15, 2014, you can only assume that the market prices of the individual components will be the same on September 2, 2014. The effect of changes in the weights due to market action is very minor in terms of calculating the dividend. However, the effect of market changes on the dividend for CEFL is greater than for UBS ETRACS Monthly Pay 2x Leveraged Mortgage REIT ETN (NYSEARCA:MORL), because of the formula that CEFL uses to calculate the weights.

There is a refinement in the calculation that can make it more accurate. Previously, I multiplied the net asset value, which is referred to as the "indicative value" in the offering documents by twice the number of shares outstanding to obtain a proxy for the total assets of the portfolio. See: CEFL August Dividend Projected To Bring Yield To 18.4%. However, indicative value takes into account accrued dividends and fees as is indicated in the offering documents which say:

"we use the term "indicative value" to refer to the value at a given time and date equal to (I) Current Principal Amount multiplied by the Index Factor calculated using the intraday indicative value of the relevant Index as of such time as the Index Valuation Level, plus (ii) assuming such time and date is the Redemption Valuation Date, the Coupon Amount with respect to the Coupon Valuation Date if on such Redemption Valuation Date the Coupon Ex-Date with respect to such Coupon Amount has not yet occurred; plus (III) the Stub Reference Distribution Amount, if any, as of such time and date, assuming such time and date is the Redemption Valuation Date, minus (iv) the Accrued Fees as of such time and date, assuming such time and date is the Redemption Valuation Date"

The Current Principal Amount multiplied by the Index Factor is a proxy for the assets upon which the dividend which is called the "Reference Distribution Amount" is based. As the offering documents say:

"The "Reference Distribution Amount" is as of the first Coupon Valuation Date, an amount equal to the cash distributions that a Reference Holder would have been entitled to receive in respect of the Index Constituent Securities held by such Reference Holder on the "record date" with respect to any such securities for those cash distributions whose "ex-dividend date" occurs during the period from and excluding the Initial Trade Date to and including the first Coupon Valuation Date; and (ii) as of any other Coupon Valuation Date, an amount equal to the cash distributions that a Reference Holder would have been entitled to receive in respect of such securities held by such Reference Holder on the "record date" with respect to any such securities for those cash distributions whose "ex-dividend date" occurs during the period from and excluding the immediately preceding Coupon Valuation Date to and including such Coupon Valuation Date.

The "Coupon Valuation Date", unless specified otherwise in the applicable pricing supplement, means the 30th of each month, and the 28th day of February, of each calendar year during the term of the Securities or if such date is not a Trading Day, then the first Trading Day following such date, provided that the final Coupon Valuation Date will be the Calculation Date."

To put it simply, a more accurate estimate of the proxy for assets which consist of the portfolio securities, and are called "the Index Constituent Securities held by such Reference Holder" in the offering documents can be obtained working backwards from the indicative value by computing the accrued fees and accrued dividends on the portfolio securities. Since the accrued fees are subtracted and accrued dividends on the portfolio securities are added, they tend to cancel out. However, if one is larger than the other, the proxy for assets could differ from the indicative value. The proxy for assets is equal to the indicative value plus the accrued fees minus the accrued dividends on the portfolio securities.

It might be noted that requests by me for some exact figures as of the valuation dates from the managers of the UBS ETRACS ETNs have not be successful. This is in sharp contrast to the public relations officers of component companies in the ETNs which, as a result of my Seeking Alpha articles have contacted me, unsolicited, offering to arrange meetings with the president of the component company and/or supply me with any information I might require in writing an article.

The accrued fees are relatively easy to estimate. The annual tracking fee for CEFL is 0.50% and the financing spread is 0.40%. The financing fee is the financing spread plus three-month LIBOR which is now 0.23% for a total financing fee of 0.63%. To calculate the accrued dividends, we have to look at each component security and see if on August 15, 2014 there are any that went ex-dividend but have not yet paid their dividends. While we cannot forecast price changes from August 15, 2014 to September 2, 2014, we can predict which component securities will have gone ex-dividend, but have not yet paid their dividends as of September 2, 2014. We can use the difference in accrued dividends to further refine the prediction for the September 2014 dividend.

The table below shows the weight, the price as of August 15, 2014, ex-date, pay date, dividend, imputed value and the imputed number of shares for all of the 30 CEFL components. Additionally, for the 22 components that have ex-dates in August, the imputed gross dividends are shown. BOE has switched from paying quarterly to paying monthly. That will increase the monthly September 2014 dividend and subsequent monthly dividends relative to previous monthly dividends but decrease future big month dividends.

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 MORL, since most of the mREIT components of MORL are quarterly payers, while most of the closed-end funds that comprise CEFL and YYY are monthly payers. YYY is a fund, not an ETN, so they do not have to pay the exact dividend amount required by the terms of the note each month as CEFL must. YYY can smooth out the big-month and small-month dividends. Therefore, YYY has paid $0.17 every month this year so far, and can make up any differential between their net investment income and distributions at the end of the year or other periods they choose. Thus, there is no point in trying to predict YYY's dividends on a month-to-month basis.

The January, April, October and July, "big-month" CEFL dividends are larger than the "small-month" dividends paid in the other months, since eight of the portfolio components pay quarterly, typically with ex-dates in the last month of the quarter and payment dates in the first month of the next quarter.

As is discussed in more detail in: CEFL August Dividend Projected To Bring Yield To 18.4%. The calculation of the September CEFL dividend begins with a computation of the total assets of the portfolio. This is done by multiplying the net asset value of CEFL on August 15, 2014 of $28.1921 by the shares outstanding of 6,500,000, and multiplying that product by 2X to account for the 2X leverage. This results in a net asset total of $366.4973 million.

For each of the 22 components with ex-dates in July, a value of the holding is computed by multiplying the weight of the component by the net asset total of $366.4973 million. For GAMCO Global Gold, Natural Resources & Income Trust (NYSEMKT:GGN), with a weight of 4.91%, this results in a value of $17.99502 million. Dividing the value of $17.99502 million by the $10.85 share price of GGN results in an imputed share count of 1.5862 million. Multiplying the imputed share count of 1.6585 million by the dividend of $0.09 gives an imputed gross dividend of $0.149267 million.

This calculation is done for the other 21 components that have August ex-dates, and is shown on the table below. The imputed gross dividends for all 22 are added up to give a total of $1.949547 million. This is divided by the number of shares, 6,500,000 to give a projected dividend for the month of September 2014 of $0.29993. However, if we were trying to predict what the dividend would be if it were to be based on the of August 15, 2014 numbers we would have to adjust the total assets for the accrued fees and the accrued dividends.

The CEFL components that were ex-dividend as of August 15, 2014, but had not yet paid is shown in the table below in the column labeled "frequency". Those components are noted by the designation xA in the frequency column. The aggregate of the dividends on CEFL components that were ex-dividend as of August 15, 2014, but had not yet paid was $669,284. For the 16 days from July 30, 2014 to August 15, 2014, the accrued fees are $82,738. The proxy for assets is equal to the indicative value of $183.2487 million plus the accrued fees of $82,738 minus the accrued dividends of $669,284 on the portfolio securities. This results in a value of the proxy for assets equal to $182.266 million.

If we were trying to predict what the dividend would be if it were to be based on the of August 15, 2014 numbers, we would adjust the projected dividend for the month of September 2014 of $0.29993 by the ratio value of the proxy for assets of $182.66215 million to the product of the shares outstanding by the indicative value $183.2487 million. That would be $0.2989702. We are of course actually interested in the dividend which will be paid based on the September 2, 2014 numbers. To obtain that we have to adjust the proxy for assets to reflect the accrued fees and dividends that will be the case on the September 2, 2014. As is shown on the table below, given the information as of August 15, 2014, there will be no components that will have gone ex-dividend but not yet paid as of September 2, 2014. Thus, we have to add back the $669,284 aggregate of the dividends on CEFL components that were ex-dividend as of August 15, 2014 but had not yet paid. We also have to subtract the additional accrued fees that will be taken out on September 2, 2014 relative to the accrued fees as of August 15, 2014. For those 18 days the accrued fees are $93,080. Thus, the predicted proxy value is $183.15562 million. Thus gives us a prediction for the September 2014 CEFL dividend of $0.29978

The projected dividend for the month of September 2014 of $0.2998 is an 3.8% increase from the August 2014 small-month dividend of $0.2888. For the three months ending September 2014, the total projected dividends are $1.1969. That would be a 2.7% decrease over the three months ending August 2014, which had dividends totaling $1.2271.

If the projection of $0.2998 for the September 2014 CEFL dividend is accurate, the annualized dividends based on the most recent three months ending in September 2014 would be $4.7876. This is a 16.84% simple annualized yield, with CEFL priced at $28.43. On a monthly compounded basis, the effective annualized yield is 18.2%.

If someone thought that over the next five years, interest rates and economic conditions would remain relatively stable and thus CEFL would continue to yield 18.2% on a compounded basis, the return on a strategy of reinvesting all dividends would be enormous. An investment of $100,000 would be worth $230,745 in five years. More interestingly, for those investing for future income, the income from the initial $100,000 would increase from the $18,200 initial annual rate to $41,995 annually.

CEFL Components as of August 15, 2014

weight

price

ex-div

pay date

dividend

frequency

value $mil

imputed shares

dividend

GGN

GAMCO Global Gold, Natural Resources & Income Trust

4.91%

$10.85

9/12/2014

9/23/2014

0.09

m XA

17.99502

1.6585

0.149267

PHK

PIMCO High Income Fund

4.36%

$12.92

8/7/2014

9/2/2014

0.1219

m XA

15.97928

1.2368

0.150764

IGD

Voya Global Equity Dividend and Premium Opportunity Fund

4.31%

$9.43

9/2/2014

9/15/2014

0.076

m

15.79603

1.6751

0.127306

ETV

Eaton Vance Tax-Managed Buy-Write Opportunities Fund

4.31%

$15.01

8/20/2014

8/29/2014

0.1108

m

15.79603

1.0524

0.116602

ETY

Eaton Vance Tax-Managed Diversified Equity Income Fund

4.30%

$11.68

8/20/2014

8/29/2014

0.0843

m

15.75938

1.3493

0.113743

NFJ

AllianzGI NFJ Dividend Interest & Premium Strategy Fund

4.27%

$18.70

6/12/2014

6/27/2014

0.45

q

15.64943

0.8369

BCX

BlackRock Resources & Commodities Strategy Trust

4.26%

$12.13

6/12/2014

6/30/2014

0.2312

q

15.61278

1.2871

JGT

Nuveen Diversified Currency Opportunities Fund

4.22%

$11.31

6/11/2014

7/1/2014

0.195

q

15.46619

1.3675

AOD

Alpine Total Dynamic Dividend Fund

4.22%

$8.70

8/20/2014

8/29/2014

0.0565

m

15.46619

1.7777

0.100441

ETW

Eaton Vance Tax-Managed Global Buy-Write Opportunities Fund

4.21%

$12.60

8/20/2014

8/29/2014

0.0973

m

15.42954

1.2246

0.11915

ETJ

Eaton Vance Risk-Managed Diversified Equity Income Fund

4.15%

$11.56

8/20/2014

8/29/2014

0.093

m

15.20964

1.3157

0.122361

EXG

Eaton Vance Tax-Managed Global Diversified Equity Income Fund

4.11%

$10.25

8/20/2014

8/29/2014

0.0813

m

15.06304

1.4696

0.119476

MIN

MFS® Intermediate Income Fund

4.09%

$5.20

8/12/2014

8/29/2014

0.0394

m

14.98974

2.8826

0.113576

BOE

BlackRock Global Opportunities Equity Trust

3.92%

$14.42

8/13/2014

8/29/2014

0.1039

m was q xA

14.36669

0.9963

0.103516

GAB

Gabelli Equity Trust

3.87%

$7.33

6/12/2014

6/23/2014

0.15

q

14.18345

1.9350

BGY

BlackRock International Growth & Income Trust

3.85%

$7.68

6/12/2014

6/30/2014

0.1679

q

14.11015

1.8373

PTY

PIMCO Corporate and Income Opportunity Fund

3.78%

$18.44

8/7/2014

9/2/2014

0.13

m

13.8536

0.7513

0.097666

BIT

Blackrock Multi-Sector Income Trust

3.52%

$18.04

8/13/2014

8/29/2014

0.1167

m XA

12.9007

0.7151

0.083454

BTZ

BlackRock Credit Allocation Income Trust

3.25%

$13.54

8/13/2014

8/29/2014

0.0805

m XA

11.91116

0.8797

0.070816

ESD

Western Asset Emerging Markets Debt Fund Inc

3.04%

$17.94

8/20/2014

8/29/2014

0.12

m

11.14152

0.6210

0.074525

FFC

Flaherty & Crumrine Preferred Securities Income Fund

2.97%

$19.14

8/20/2014

8/29/2014

0.136

m

10.88497

0.5687

0.077344

LDP

Cohen & Steers Limited Duration Preferred and Income Fund, Inc

2.83%

$24.85

8/18/2014

8/29/2014

0.156

m

10.37187

0.4174

0.065111

EVV

Eaton Vance Limited Duration Income Fund

2.29%

$15.09

8/7/2014

8/18/2014

0.1017

m XA

8.392788

0.5562

0.056564

JSN

Nuveen Equity Premium Opportunity Fund

2.11%

$12.71

6/11/2014

7/1/2014

0.254

q

7.733093

0.6084

CII

BlackRock Enhanced Capital and Income Fund Inc

2.05%

$14.81

6/16/2014

6/30/2014

0.3

q

7.513195

0.5073

BCF

BlackRock Real Asset Equity Trust

1.81%

$9.26

6/12/2014

6/30/2014

0.1748

q

6.633601

0.7164

FAX

Aberdeen Asia-Pacific Income Fund Inc

1.57%

$6.11

8/20/2014

8/29/2014

0.035

m

5.754008

0.9417

0.032961

BDJ

BlackRock Enhanced Equity Dividend Fund

1.33%

$8.21

6/12/2014

6/30/2014

0.14

q

4.874414

0.5937

PFN

PIMCO Floating Rate Strategy Fund

1.19%

$10.91

8/7/2014

9/2/2014

0.08

m XA

4.361318

0.3998

0.03198

ERC

Wells Fargo Advantage Multi-Sector Income Fund

0.91%

$14.55

8/11/2014

9/2/2014

0.1

m xA

3.335125

0.2292

0.022922

Source: CEFL September Dividend Projected To Bring Yield To 18.2%