Around this time each year, closed-end fund investors review their portfolios to look for opportunities to realize tax losses. These losses can be used to offset realized gains in other securities and up to $3,000 in net losses can be deducted against income. Some CEF sectors experience strong selling pressure, which widens discounts to NAV coming in to the year end. These funds often bounce back strongly in January when the selling pressure lets up.
In some years, municipal bond CEFs experience a lot of tax related trading, because there are over 200 muni bond CEFs that are fairly similar. But they are different enough so that the IRS allows tax bond swaps where you sell one muni bond CEF to realize a tax loss and replace it with a another similar muni bond CEF. This tax swapping activity was quite popular in 2010.
But this year, municipal bonds have been one of the strongest sectors and there are not many losses to be had. It is unlikely that muni fund CEF discounts will widen much due to tax loss selling.
One sector that has experienced significant tax loss selling this year is Option Writing closed-end funds. Discounts have widened considerably in this sector and may widen even further, but I think we may see a nice recovery in late December and early January.
Here are some Option Strategy closed-end funds whose discounts have significantly widened recently and have most likely been subject to tax loss selling. If you already own any of these in a taxable account and can use a tax loss, you may want to consider doing a tax swap to realize a potential loss and replace the fund with something similar.
1) Federated Enhanced Treasury Income Fund (NYSE:FTT)
- Invests mainly in U.S. Treasuries and some U.S. Agencies. Seeks enhanced monthly dividends by writing call options.
- Current discount to NAV= -13.92%
- 3 Month average discount= -10.32%
- 3 Month Z-Statistic = -3.05 (over 3 standard deviations!)
2) Eaton Vance Risk-Managed Diversified Equity Income Fund (NYSE:ETJ)
- Owns a diversified portfolio of common stocks. Seeks additional tax advantaged income and gains by investing in stocks that pay qualified dividends, writes out-of-the-money put options on individual stocks, sells stock index call options against the portfolio and buys stock index put options for downside protection.
- Current Discount to NAV= -17.47%
- 3 Month Average discount= -14.20%
- 3 Month Z-Statistic= -2.31
3) Eaton Vance Tax-Managed Buy-Write Income Fund (NYSE:ETB)
- Owns a diversified portfolio of common stocks and sells S&P 500 index covered calls against the portfolio.
- Current Discount to NAV= -14.47%
- 3 Month Average discount= -11.77%
- 3 Month Z-Statistic= -2.25
4) Eaton Vance Tax-Managed Global Buy-Write Opportunities Fund (NYSE:ETW)
- Owns a diversified portfolio of U.S. and international common stocks and sells call options on broad-based domestic stock indices.
- Current Discount to NAV= -15.69%
- 3 Month Average discount= -12.75%
- 3 Month Z-Statistic= -2.05