ETJ Offers Steady Monthly Income And Uses Option Collars To Manage Risk

| About: Eaton Vance (ETJ)

Summary

Eaton Vance Risk-Managed Diversified Equity Income Fund is a closed end fund and has a steady monthly income of $0.093/month or 11.8%/year.

Total return is 11.23% less than the DOW average total return, over the last 39 month test period.

The Fund is 24.81.% in information technology companies 4% higher than the S&P 500 index the fund models.

Good downside protection and income from option collars on S&P 500 index.

This article is about Eaton Vance Risk-Managed Diversified Equity Income Fund (NYSE:ETJ) for steady monthly income and a secondary goal of capital appreciation. The fund try's to model the S&P 500 index and does a good job at it. The ETJ fund invests in large Cap and Mid Cap companies that have above average growth and financial strength. Topics to be looked at are Yearly Income Percentage, Total Return And Discount, Company Allocation, Sector Distribution, Options Method, Distributions, and Takeaways.

Yearly Income Percentage, Total Return And Discount

Being in retirement, my goal is to have a steady monthly income, without the swings of dividends that are paid on a quarterly or yearly basis. The ETJ fund distribution of 11.8%/year ($0.093/Month) return in today's low interest rate environment is fantastic and gives income investors a solid foundation.

I calculated the total return of ETJ over a 39 month period starting with January 1, 2013 till early April 2016 YTD, 39 months in total. I chose this time frame since it included the great year of 2013, the moderate year of 2014, the losing year of 2015 and the slight up year of 2016 YTD. ETJ underperformed the DOW average by 11.23%. For the 39 month period, the DOW total return was 34.13% and ETJ missed that at 22.90% giving a good gain of 7%/year but not matching the DOW average. For risk adverse investors that what steady income ETJ might be a good choice but at the cost of reduced gains in a strong up market. The economy seems to be moving forward slowly which is good for ETJ with its collar option approach to dampen the moderate swings of the market and its high percentage of information technology companies.

ETJ sells at a 9.75% discount to the NAV price. There are investors that like to play the discounts of CEF funds against each other, this is beyond my knowledge. This deep relative discount might be a choice for those who like to play the discount game.

Company

Total Return for 39.0 Months

Difference from Dow Baseline

Yearly Distribution

ETJ

22.90%

-11.23%

11.8%

DOW Baseline

34.13%

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Company Allocation

The Eaton Vance website gives a full list of the companies and percentage of each company in the fund portfolio for the latest quarter. The table below gives the top ten companies for the fund and their percentage in the fund portfolio. Using price chart data, I calculated the total return of the ETJ top 10 companies out of 55 that the fund owns.

Company

Percentage

In Portfolio

Apple Inc. (OTC:APPL)

4.17%

Alphabet Inc. (NASDAQ:GOOG)

4.13%

General Electric (NYSE:GE)

3.38%

Amazon Inc. (NASDAQ:AMZN)

3.22%

Visa Inc. (NYSE:V)

3.19%

Watt Disney Co. (NYSE:DIS)

2.95%

Johnson & Johnson (NYSE:JNJ)

2.80%

JP Morgan Chase & Co. (NYSE:JPM)

2.62%

Danaher Corp. (NYSE:DHR)

2.60%

Corning Inc. (NYSE:GLW)

2.44%

Total

31.50%

Click to enlarge

Source: Eaton Vance

All ten outperformed against the DOW average in total return of 34.13% over the 39 month test period. The total percentage for the top ten companies in the fund is shown at the bottom of the table. So overall the fund has large cap companies in its portfolio but is producing a total return below the DOW average but gives good downside protection at the expense of the upside over the 39 month test period. The fund has three companies GE, JNJ and DIS that are in The Good Business Portfolio.

Sector Distribution

Shown in the table below is a comparison of the S&P 500 index percentage and fund percentage for the top five sectors in the fund. The fund is about 4% high in the technology sectors with the others close to the index.

Sector Name

S&P 500 Percentage

Fund Percentage

Information Technology

20.69%

24.81%

Financials

16.47%

15.88%

Health Care

15.16%

14.69%

Consumer Discretionary

12.89%

13.79%

Industrials

10.05%

7.97%

Click to enlarge

Options Method

ETJ sells S&P 500 index Covered calls against 96% of the portfolio value with an average duration of 13 days that are out of the money by 2.1% and at the same time buys S&P 500 index put options against 96% of the portfolio value with an average duration of 13 days that are out of the money by 5.6%. This combination of covered calls and buying puts is better known as a collar option strategy. The collar's provide ETJ fund portfolio good downside risk protection at the expense of upside gains but smooth out the normal market gyrations. The management in using collar's, has the time to use option exit methods, if the market price strongly goes against them. For ETJ using option collars on the S&P 500 Index provides fair total return in a strong up market and gives good downside protection in weaker markets at the expense of the upside gain. In this volatile market the option collars do give greater protection on the market downside than other CEF's that just write covered calls. Please see my recent article on Eaton Vance Enhanced Equity Income Fund (NYSE:EOI) for a fund that has the same top ten companies but sells covered calls only on individual companies but does not have the lower downside risk of ETJ.

Distributions

Each month, the fund issues a statement saying which part of the distributions comes from short-term capital gains, long-term capital gains, investment income and return of capital. It is best to have ETJ in a Tax deferred account to take advantage of the large investment income nature of the fund. ETJ distribution for December 2015 has the cumulative distributions for the year that was 100% investment income, 0.0% short-term capital gains, 0.0% long-term capital gains and 0.0% return of capital. This is typical with investment income being a significant part of the ETJ distribution. ETJ so far this year has an return of capital which is high at 91.4% which is unusual. The fund does fair in a strong up market and follows the market in an average market. The fund managers advise against drawing any performance conclusions from the distribution breakdown. They do manage the fund payouts to try and keep the monthly payment constant. The negative side of the return of capital in a taxable account is that it reduces your cost basis so that upon selling, you will have a larger long-term capital gain if held more than a year. For a full explanation of return of capital, please refer to the article written by Douglas Albo (CEFs and Return of Capital: Is It as Bad as It Sounds?).

Takeaways

ETJ is a good income vehicle in a tax-deferred account. It gives a high monthly distribution which is steady but underperforms the DOW average over the test period of 39 months but has good downside protection using the option collars. ETJ is a fair complement to individual company positions. ETJ follows the market in an average market and does fairly well in a strong up market. ETJ provides steady income, with fund price muted both on the upside and down side swings by the option collars.

ETJ is not part of The Good Business Portfolio that I usually write about (see my article on 2015 fourth-quarter performance for the complete portfolio list), but has been commented on by many SA readers as a fund they own and like.

Of course this is not a recommendation to buy or sell and you should always do your own research and talk to your financial advisor before any purchase or sale. This is how I manage my IRA retirement account and the opinions on the companies are my own.

Disclosure: I am/we are long GE, DIS, JNJ.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.