Equity CEFs: Eaton Vance Really Wants You To Own Its Option-Income Funds [View article]
Reply to ehsii ... Saw your comment and wanted to illustrate an answer to show why these Option Income funds are not necessarily "removing equity from the fund" as you mention. First aspect to consider is that there are TWO separate equity investments here ...ETY holds common stock and SELLS S&P 500 index calls each month ....two separate items that are taxed and distributed ...so ..unlike a CMO bond for example; where they distribute a good portion of principal as ROC each month as the underlying mortgages are paid back; Option Income funds are Selling Calls (ETY) each month and closing out 90% + of them every 2-3 weeks ... ETY recieved about $90 million in Option premiums over the last reported six months doing this ...but spent over $103 million closing them out ....creating an estimated $13 million loss - taxed at 60% long term losses and 40% short term losses ....
Now ...ETY has about $1.6 billlion invested in the stock market ...mostly in blue chip companies like Apple / Exxon ....and that portfolio value went UP during the same six months ....much / much more than the $13 million loss ..( they hold $60 million of Apple stock for example which went up significantly )
This portfolio value increase was measured in their last six month report at + $250,000,000 ....in NUA ...net unrealized appreciation.
These funds typically use a so-called managed distribution process to pay out their respective dividends which allows the fund to pay out their dividend distribution on an equal basis ....and provide some certainity to investors about the dividend cash flow ....so ...where does the money come from to pay out the huge distribution ?
Three places - 1. The dividends the portfolio generates ..but that cant typically be more than 2% per year ...( and portfolio expenses are paid from dividends recieved so that leaves about 1% for investors )
2. In a declining market ...the option premiums received for selling Call options can help pay for the distribution ....ETY needs about $187 million each year to pay an 11% annual distribution ....and the last six month report showed they booked $90 million in premiums ...hmmmmm...but then closed out that with a $103 million buy back ....
3. They use appreciation in the stock portfolio to pay the huge distribution ....and they have about $250 million on hand ( today ) to do exactly that ....lol ....
When there is no appreciation in the portfolio ....the Option premiums received will help offset the cost of the dividend distribution ...as the fund management will not be closing out the CALL options ...as they will be profitable ....
The IRS loves short term transactions ....they get to tax them at the HIGHEST possible personal income rate ....BUT ....wait ...these funds all have a huge anount of capital loss carry-forwards from 2007 / 2008 to wash against these new capital gains ....netting in a ZERO TAXATION .....until 2018 when the carry-forwards will expire ....( whew ...lot to explain )
So ....the net distribution from funds like ETY are classified as 90% " Other Capital " ....and is non-taxable ...where the remaining 10% is dividends and interest ...which is taxable ...
Bottom Line - The fund is NOT eating itself up with return of capital like a mortgage bond does ....you get some downside protection in the market as the fund is Selling index calls each month ...and upside potential as the fund closes out these Calls every 2-3 weeks for a loss when the market is good ( going up )...and you are buying the fund at a 13-15% discount to its actual underlying value .... Hope this helps explain ....regards
Equity CEFs: Eaton Vance Really Wants You To Own Its Option-Income Funds [View article]
Nice article Doug...a couple of questions though ...you mention that holders of ETY will have to adjust their cost basis by the ROC component ...I just dont see that as practical or even necessary as ETY, in specific, uses a methodology of Selling S&P 500 calls and closing them out each month by Buying them back ....Since the fund exclusively uses CALLS and not PUTS ...no adjustment of basis is necessary. I believe that current tax law allows for a 60/40 split of long and short term gains classification of the proceeds ....( similiar to commodity contracts ) which allows a super short holding period such as the 2-3 week average duration that ETY uses as a typical holding period for the 80,000+ S&P call contracts it buys and closes out each year. Also ...you didnt mention the HUGE capital loss carry-froward these funds and ETY have on the books thru 2017 ...ETY has approximately $500,000,000 in capital loss carry-forwards to " wash" against future capital gains ....so ....investors can look forward to ZERO taxation on capital gains thru 2017 in this fund ...only paying taxes on the stock dividends actually credited from the portfolio ...lets call it 10% of the 2013 estimated distribution ...$1.01 per share x 10% = $0.10 ....x your income tax bracket rate ...lets postulate 28% on average = a federal tax obligation of $0.028 per $1.01 in cash actually recieved in 2013 or a measley 2.8%. Comparative investments in dividend paying stocks / ETFs or dividend capture mutual funds WILL be taxed at your ordinary income tax rate up to 39.6% ....plus the 3.8% Obamacare tax for income over $388,350 in 2013. So ...investors in the option income funds will pay NO capital gains taxes for years ...and typically less than 3% on the total distribution paid out in 2013 ....Investors in CDs / Money market funds / rental income / ordinary dividends / preferred stocks will be paying typically 25-35% of the proceeds they recieve in 2013 ... This aspect gives the so-called Option Income funds a compelling advantage in the coming years ...( at least until 2017 ) Thx - look forward to your response - Mike
This was repeated for the remaining three quarterly dividends paid in 2011....
The net result being that ETY created a qualified dividend stream to me in 2011 of $26.78 ....and taxable at 15% back then ...so $4.02 of the $26.78 was required for federal taxes due ....
ETY also contributed $2,759.65 in completely non -Taxable, non dividend distributions .... ETY distributed ZERO short or long term capital gains ....ZERO / ZIP / NADA ...in 2010 or 2011. ( because the capital loss carryforwards washed all capital gains away )
The Summary also had this listed :
Return of Principal distributions ......................... $0.00
Summary / opinion - I paid $4 in federal income taxes on cash received / reinvested of $2,786.43 ...Thats about a 0.0144% rate ...( check my math but $4 on $2786 is way less than 1% )
Less than the cost of the " meal deal " from Subway ...or a Happy Meal at McDonalds ....got me $2,782 in net tax-free Income.
To be extra -certain ; I checked the other brokerage account where I have ETY ....at a different firm ....and saw the exact same accounting result and methodology ....
No ROC / No Basis Adjustments ....This is just Other Capital or non-dividend distributions ....
As I stated before; this is not some sleazy accounting gimmick ..Its actually the only way to account / pay taxes correctly on the distributions from this security....
If ETY didn't have such a huge amount of capital loss carryforwards ...I have no doubt that much of this income would have been classified as short and long term capital gains ....and taxable at a very high level ...plus potentially Obamacare investment tax depending on your income ...( 3.8% more potentially )
My guess is that we will have 3-4 years of this super-favorable tax treatment ...and then face the consequences of high taxation that our lawmakers have bestowed upon us ....
As more and more people figure this out ...I predict that there will be a migration from high tax funds ....to these high yield / low tax funds ...not just ETY ....but that's the one Option Income fund I own...lol ...so I am hoping the renewed interest will stimulate buying and move the market price even higher ...
Hope this helps ...I really tried to make it understandable and specific ...we still have market risk and plenty could go wrong in our investment thesis ..but I am looking for + 20-25% from this fund in 2013 ...we almost got that much last year alone ...
Equity CEFs: Eaton Vance Really Wants You To Own Its Option-Income Funds [View article]
Thanks for the reply Doug ...I appreciate it. My contention, which may well be incorrect, is that NO ADJUSTMENT of cost basis is necessary with ETY....this is important because many potential investors would be loathe to try and figure out such an adjustment and perhaps fear some type of IRS challenge to any guestimates they might, in good faith, try to apply to the basis ...thus intimidating them away from this type of fund. ( who wants IRS problems ? or to try and calculate the basis reduction ? ...not me ) One of the points to owning a mutual fund is to let them figure out the taxation stuff ...lol. ETY started out in 2006 with a professional Options Advisor that essentially charged them a fee to WRITE CALL options against the portfolio holdings each month ....The thesis then was that exercised call options had the premiums received ADDED to the option strike price to calculate a capital gain ...( typically short term with ETY ) ...no adjustment to the cost basis was allowed or necessary under tax law ....premiums just increased net proceeds. Later, ETY management decided to FIRE the Options advisor and revert to exclusively writing WRITING S&P index calls at the next higher strike price from the prevailing market EACH MONTH ...and then ...CLOSE out the transaction typically within two-three weeks ...and repeat the cycle ....SELL / CLOSE ...
The six month report in April, 2012 shows ETY recieving $90,698,884 in S&P Index call premiums ....BUT ....paying $104,386,575 to close out the majority of these positions ....lets postulate a ( $13,687,000 ) LOSS over the preceeding six months.
This was fine and dandy ...because the overall portfolio value was appreciating with the market ...much more than the $13.6 million loss .... ETY management has been using the IRS rule 1256 tax treatment of equity index options where even short term holdings of Index options were taxed at 60/ 40 ...60% long term / 40% short term ....so an investor in the 25% tax bracket would still get a net 19% capital gains tax rate on short term transactions using equity index options. ( whew )
The REALLY interesting part, however, is that ETY is managing to book a raw LOSS on virtually their entire S&P index option trading ...estimated to be approximately 100,000 contracts each fiscal year ....because, in a rising market, it just makes a ton of sense to close out the index options each month, book a loss, and let the stock portfolio continue to appreciate ....ETY reported in April that they have $251,000,000 in NUA .... So ....they have nothing to " adjust " ....and INCREDIBILY this trading at a loss tactic even ADDS to the future capital loss carry-forward amounts ...( hard to believe ...but true ) These guys are even booking NUA from their share re-purchase program ...showing a +3.45% gain in the Nov 5 update ....just on ETY. This entire ROC debate is clouded with confusion ....PUT contracts do have a basis adjustment / bonds have an ROC component ....but ....NOT CALL contracts ...The IRS allows the term " OTHER CAPITAL " on the brokerage 1099 statements which is non-taxable ...and ETY uses this avenue to provide year end tax reporting ....OTHER CAPITAL, from the option premiums for example, can and will be taxed at the Short Term / Long Term rates ( which the IRS LOVES ) ....BUT ....when the fund has $445 million in carryforwards and is losing money on their Index Option trading each year .....there is literally NOTHING to tax.
Again, not to be arguementative, but I would never own a mutual fund where I had to guestimate or adjust the basis ...and even long term holders of the fund should have a plan to SELL ....perhaps if the fund moved back to a premium to NAV ? ( a + 10% Premium would force me to sell for example ) ....
Appreciate your article and quick response ....Thx - Mike
Looking Closer At The Closed-End Buy-Write CEFs [View article]
Paulo - Thanks for the updated article and the companion piece by Doug Albo on ROC. A few comments and reinforcement points on ETY in specific and Buy-Write funds in general: 1.No adjustment of cost basis is required as the fund ONLY sells S&P 500 index CALLS against its portfolio. ( approx 70,000 contracts per year ) - PUT contracts are different but since the fund management does not use that strategy ...no point in discussing. 2.When call contracts are exercised ...the premium is tacked on or added to the strike price and the net proceeds are taxed as Capital Gains ( typically short term and at a very high rate ) - Index calls, however, are subject to the raw 60/40 - long / short term tax treatment regardless of holding period - even one or two days of duration. 3.The average holding period / duration for ETY index call contracts is TWO WEEKS ...and they close out 90-95% of their open positions for a loss or a gain ...then SELL another months CALL options at the next closest strike price out-of-the-money ...so ...12 times each year they ' reload ' S&P 500 Index calls....Individual investors seeking to replicate this tactic would necessarilly expose themselves to " UNLIMITED RISK " that a short / naked index option provides ...( suitability / financial resources / experience and the necessity of having a large asset base would preclude most small investors from such a naked strategy ) and would almost certainly guarantee a major hit should the underlying market make a sudden move upwards ( + 244 points on Dow the other day for example ) 4. Leverage - Closed End funds typically borrow heavily to magnify their positions and then issue preferred shares to further amplify the risk / reward equation. ETY does not use any significant form of leverage or borrowing ...( many CEF's wind up having an aggregate 50% overvaluation due to this type of risk and makes them subject to large and distressing price swings ...especially in down markets.) 5.Liquidity - ETY has approximately $1,700,000,000 in assets and an average volume of 400,000+ shares per day ....In a tight / down market, smaller CEFs will experience problems executing orders...not so with larger funds. ( ever recieved a " nothing done " or stock ahead notice ? ) 6. Capital Loss Carryforwards - probably the secret weapon for investors in the coming years ...ETY has over $445,000,000 in carryforwards and investors buying the fund can participate in these carryforward losses thru 2018 ...thus avoiding the "taxmaggedon" that our intrepid lawmakers have in mind for us in six short months. 7. ETY publishes the estimated tax characteristics of each distribution quarterly and sends a separate letter / notice of distribution to each shareholder. Thats how we know that the ytd estimate of ROC is 87% of the total distribution ( unaudited ) 6.Discount to NAV - a 15% discount in buying shares of APPLE / EXXON / COCA-COLA / JP MORGAN /PFIZER / IBM / AMAZON and McDonalds which compose the largest positions in ETY make this fund worthy of consideration ...if the discount expanded to 20% to NAV ....the fund would be more attractive for investors like me ...conversely ...a few years ago ...ETY was trading at a PREMIUM to NAV ...that is a danger / warning sign of overvaluation. 7. Anger / brokerage statements - many investors purchased this fund on the IPO and paid $20 per share ....when they see the monthly statement - ETY is typically the " BIGGEST LOSER " by a wide margin ...$11 per share loss / into a $20 purchase price = a raw 55% loss despite the significant market rally since March 2009. Especially true if they have been taking cash from the distributions instead of reinvesting the dividends ...plus it seems that every time fund management reduces the dividend ...the market price takes a big hit ...( again ) ...even dividend reinvestments show up on the statement as new purchases in a fast declining market price ..( ouch ) - The net result being a distortion to the extreme of the actual LOSS taken ... Summary - ETY is invested in large cap ( blue chip ) US companies to the tune of 77.8% of total portfolio and another 6.9% in the UK ...so it can be considered a proxy most similiar to the S&P 500 index ...with a bit more concentration ...if an investor believes that the US economy will rally, especially the cash heavy companies like APPLE / EXXON ...its a good way to participate in a very impressive stock portfolio ...AND ...use the naked index CALL strategy that most small investors are loathe to risk ....AND ...when everyone else in the US is paying 33-43% federal taxation on their distribution of income and capital gains in 2013 ...we will be paying Federal taxes on roughly $0.13 of every dollar of income distributed from ETY in 2013.( assumes 87% ROC ) Even at an average 40% mandatory tax rate that works out to $0.05 in tax due for every DOLLAR we earn ... and that makes these so-called Buy-Write funds a compelling story ... Hope this helps - your comments appreciated - Mike
Equity CEFs: Eaton Vance Really Wants You To Own Its Option-Income Funds [View article]
Reply to no2cattx - Thanks for your reply and question. The answer is on page 13 of the semi-annual report to shareholders- Section D - Federal Taxation - ETY has $445,775,309 in capital loss carry-forwards that can and MUST be applied to capital gains going forward ...I did note that the capital loss carryforwards were itemized by expiring year ...and that $53,547,524 will expire, if not washed against capital gains at the end of 2018. In my opinion; this is HUGE ...as investors; we can anticipate a full SIX YEARS of paying little to no capital gains taxes from this fund, regardless of tax rates or increases that may be imposed ...because fund management gets to " wash " their past capital losses against future capital gains thru 2018. Many mutual funds have aggregated tax loss carry-forwards on their books and ETY is no exception ...its just that they have $445 million ...lol .... If you had a choice of buying a new issue mutual fund that did the exact same thing and the identical trading strategy as ETY ....you would essentially get " clobbered " by huge capital gains taxation ( assuming the fund had a good year ) ....because capital gains, especially short term capital gains ...are designed to be taxed at a very high rate ...estimated 30% under the President's proposed tax plan ..( ouch ) ...but by using some of the older funds which have built in capital losses that can be washed against gains ...you will pay ZERO capital gains ...NADA / NUNCA / ZIPPO ....LOL Its an unintended benefit of coming out of a recession and having big losses ...( who didn't in 2008 ? ) ...and probably the reason the Federal government will get no where near their tax revenue projections from raising the tax rates as they expect ....Investors will have capital loss carry-forwards from all those investments that tanked back in 2007 / 2008 .... Why would you pay a 30% tax on your at risk gains ? ..when you could pay ZERO ? and get some benefit from all the losses endured a few years ago ? ... Hope this helps ..and thx for the comment
Equity CEFs: The Insanity Of CEF Investors [View article]
Respectively , and as you said,....ETY did start out at $20 and is now trading a bit above $10 per share ...
My brokerage statement shows a long term unrealized capital loss on the investment of ($8,248) ...making ETY one of the biggest LOSERS in my portfolio ...
But wait ...I have $3,614 MORE dollars of current value than on DAY ONE of the IPO .....how can that be possible ?
The accounting rules treat each dividend reinvestment of new shares as if you wrote a new check for the purchase ...
Over time ....we have collected numerous dividend checks resulting in many / many new shares of ETY ....The new aggregate number of ETY shares, even at $10 per share ...is greater than the initial investment ...by about $3,614.
So .... I could SELL my shares of ETY and realize a Capital Loss of $8,248 ....wash that loss against any other capital gains I may have had ...reducing my tax bill by about $2,000 ( 25 % tax bracket ) and still have $3,614 more dollars than when I started....call it a $5,600 hard dollar gain ...thru one of the worst recessions in US history.
Not too shabby ....
The simple truth is that if you purchased ETY on the IPO ...and reinvested your dividends ....you have MORE money or cash value today than when you started ....not rocket science ...but it " beats-the-sox off " actually losing money ....
Now your arguement against ETY is that ..." well, yes I made some money ..( + 6-7% net ) ...but I could have done better buying something else ..."
Ok ...you got me ....( said in good humor and not intended to be offensive )
Hope this helps explain why so many people pour HATE on the fund ....the monthly statements really do show this investment as a huge LOSER ....despite you having more money than when you started ...
Equity CEFs: The Insanity Of CEF Investors [View article]
KB - saw your question ....let me re-state the reasoning there can be no " adjustment to cost basis " for tax reporting purposes for specifically ETY. ( other funds may be diferent ) 1. The fund holds two distinct types of securities ....common stock and S&P 500 index options ...exclusively CALL options. 2. IRS tax law regarding index options was settled in the early 1990's by the US Supreme Court ..They are specificly treated as Section 1256 contracts where the holding period or duration of the contract does NOT determine long or short term gains ...rather a simple 60% long term / 40% short term formula is applied to all GAINS from the proceeds of the index option transaction. So ...a one day or one hour duration still gets you 60 / 40 tax treatment. 3. Here is an example: if you re in the 25% bracket, the effective rate on short-term gains from trading in these options is only 19% [(60% x 15%) + (40% x 25%) = 19%]. That s a 24% reduction in your tax bill. 4. ETY is Selling and Buying back over 80,000 S&P 500 index call contracts each year ....the KEY terminolgy to keep in mind is that any GAINS or LOSSES are treated as CAPITAL GAINS / LOSSES... and MUST ( by tax law ) be accounted or " washed " against previous carryforward losses in the fund ..ETY has about $450,000,000 in REALIZED losses from 2008 ... 5. Every dollar of gain from the investment portfolio must be " washed " against that huge carryforward loss number thru 2018...before we get the first penny of capital gains taxation. 6. Now ....to your question of ROC ....lets postulate that ETY has paid out about $9.40 of dividend distribution since inception ...with about 90% of that being called Other Capital or ROC depending on your brokerage firm 1099 form. So call it $8.40 per share of ROC to reduce your cost basis ? That would impute your true cost basis to around $1.60 per share ....with ETY trading around $10 per share. Hmmmmmmm....sort of a " Roll your own " cost basis depending on your purchase date ....what a potential disaster of accounting / reporting that would be .....especially with the IRS requiring that cost basis information be included on every 1099 report of proceeds this year ....( an impossible task given this premise of reducing the basis by ROC and the literally tens of thousands of share holders in the many different option income funds ) 7. Secondly ...realize that the 80,000 plus Index call contracts the fund is selling and closing out ( usually within 2-3 weeks ) are NOT related directly to the portfolio ....the index options are settled in cash ...you cant simply deliver shares of stock to pay for them or have your Apple shares called away in an exercise so to speak ...The option contracts are separate securities ..from the stocks held in the portfolio ...and MUST be taxed as capital gains / losses as mentioned above. These are literally " naked " or uncovered option positions ....and most investors would not qualify or be considered suitable to trade " naked " S&P 500 call options ..( ask Doug how many times he has gone " naked " with index options for himself or his clients ? ...doubt he does it much..if at all ) The maximum loss potential alone would give pause to any investment advisor or client .... 8. ETY employs Deloitte & Touche as their auditors and they certify the annual reports and the accounting methods used ....Under the Securities Act of 1940 this is a mutual fund ...where gains / losses and income are " passed -thru " to the owner or shareholder minus of course the funds expenses ....Deloitte & Touche DO NOT report any potential cost basis reduction in ANY of their quarterly / semi annual or annual reports ....since inception. 9. ETY was incepted with an Options Advisor firm essentially doing "covered calls " against the portfolio positions ....they later FIRED that firm ...and adopted the index option CALL tactic ...it was cheaper and much more tax efficient. But ...lets assume that the fund had continued to use a " covered call " strategy instead of the " naked " index calls ....when exercised ...the premium recieved is simply ADDED to the Strike price of the exercised call option ..no adjustment of cost basis is allowed / permitted ...even then. 10. Finally ..ETY was created to provide high income with tax efficiency ...with potential price appreciation in the portfolio as a secondary target ....Nobody in their right mind would want to own a fund where there were cost basis adjustments 12 times per year ( monthly dividends ) or where the IRS could swoop in and smash you with a huge capital gain tax bill at their lesiure ....by that same thinking ...no one would own Commodity or index option contracts...which is why the Section 1256 rules were instituted in the first place ...orderly / simple / efficient accounting rules to regulate the fast growing commodity / broad based index option market. 11. I think that anytime a document or author mentions the character and risk features of standardized options ....the default language is written to cover every base ..CALLS / PUTS / Index ...and subsequently there is mention of potential cost basis adjustment ...( exercised PUT contracts have that feature for example but CALL options absolutely do NOT ) ETY exclusively uses index CALL options ....so cost basis adjustment is not a consideration. 12. This is not simply some accounting " gimmick " or slick way to avoid " fair share " taxation ....the IRS loves to tax us at the short term rate ....and sometime in the future ...( 2019 ? ) ...ETY may start producing tons of capital gains taxation ...and we will be facing a 19% blended tax rate on the 85% of the annual dividends we receive from the fund plus the dividend tax rate on the other 15% ...( 25% tax bracket assumption ) ....that will be a so-called " Chappaquiddick " moment for all of us ...." we will cross that bridge when we come to it" ...lol In the interim ....enjoy the anomoly of the large tax advantaged dividend distribution ( 10% annualized ) , the discount to NAV, and the potential of real growth in the portfolio ...and the approximate 4% Federal taxation rate ... When its over... we wont see this type of tax advantaged income for quite some time .... Hope this helps explain the ROC issue ...thx
Equity CEFs: The Insanity Of CEF Investors [View article]
Doug - Interesting article on ETY / AOD comparison. A few points to consider and emphasize ..... 1. ETY purchased about 1.5 million of its own shares during Sept & Oct 2012 and was booking for accounting purposes some nice short term unrealized gains ....They stopped reporting their monthly purchases after the Nov 5 announcement ...but by my estimate...they have the authority to purchase another 9% of the outstanding shares of the public float in the market which should further reduce that large discount to NAV, and improving the market price ...Interesting that they stopped doing public disclosure monthly of their re-purchase activity...we will have to wait for the semi-annual report to update that buying activity. 2.We recently passed the Jan ex-dividend date for the first monthly distribution ....and the fund's market price held steady ...even moved up along with the market a bit. While early, this may be vindication of fund management's decision to go to a monthly distribution vs quarterly. In the past, we were whip-sawed by price movement / volume around the ex-dividend dates ...as I believed the dividend " chicken-hawks " would swoop in ...buy the shares and then dump them within a few days / weeks ....Looks like this day-trading has slowed down or even stopped ...and thats good news for the longer term holders. 3. Another unintended consequence of the disastrous markets of 2007-2008 is the reality that many mutual funds, but particularly CEFs have huge / outsized capital loss carryforwards to wash against future capital gains for 4-5 years going forward ....ETY has approximately $450,000,000 for example ....on a fund with $1.6 billion in assets ....( AWP has $1.2 Billion with only $666 million in assets ) This is a huge advantage for new investors who can buy the fund and effectively pay ZERO capital gains taxes for 60 or more months ....the only taxes would be on the dividend stream earned by the portfolio itself ...about 15% of the 2012 distribution ..call that about $1.04 per share so ( roughly ) $0.88 is considered Other Capital and $0.16 is taxable ...say at 25% Federal rate = you owe the IRS about $0.04 for every $1.04 in distribution received ...an effective rate of 3.8% ....thats real tax efficiency. 4. Comparing ETY with municipal bonds in a tax advantaged account ....ok ....10 yr maturity / AAA muni bonds are yielding 2% and that would be tax free ...so after 10 yrs investment duration...you would have about $12,201 in total return value with the AAA muni ..( unless, of course they were Stockton CA or any Chicago / Detroit bonds ...where zero is a more likely investment result ) ....ETY ...with market risk and assuming the same $10,000 investment and an exactly FLAT market price over the entire 10 yr duration...but with monthly dividends of $0.083 ...would have a value of $19,960. And ...what if the market return was greater then zero % for the next 10 years ? say a paltry + 5% annualized ? ( we did after all just book a +16% 2012 ) well ...your value would be $29,358 ...I understand the premise that tax free investments inside a tax sheltered account don't make a lot of sense ...ETY is tax advantaged, not tax free...and its defensive / cautious tactic of using S&P index calls to partially protect the portfolio make it a good choice for IRA accounts ( in my opinion ) just as the Feds ALLOW covered call writing inside IRA accounts as a " conservative income strategy " 5. Lastly, There will be NO ADJUSTMENT of COST BASIS with this mutual fund because of ROC or OTHER CAPITAL received ..Its an accounting nightmare and an urban myth that has impeded the performance of the market price. The tax law on index options was settled in the US Supreme Court back in the early 1990s ....think about it ....the thousands of ETY shareholders artifically reducing their cost basis by a made up number ...The IRS trying to determine the exact cost basis ...ETY reporting by 1099 a totally different number ??? It would be a disaster ...and an open invitation to an IRS audit ...every year. ETY is closing out 95-97% of their Index Call options each month ...TAX LAW calls this a capital gain or loss transaction ....no adjustment of cost basis is allowed or permitted ....( that happens with PUT contracts ) ...ETY is therefore " washing " any generated capital gains from the sale of stock or index option transactions AGAINST carryforward capital losses with the net result being ZERO capital gains ...and no capital gains taxation for the next 60 months ...at least. This inherent debate over ROC / OTHER CAPITAL continues to "dog" the fund...first it was that the fund was cannibalizing itself with excessive distributions that would lead the NAV to zero in a few years ....( AOD anyone ? ) ...then this mantra of "reducing the cost basis " amount of non-taxable income paid ....started to appear on discussion boards and in articles ....NEITHER is true ....but this ROC debate is particularly deceptive ....and inaccurate. The IRS absolutely loves the tax structure of these Option Income funds ...they get to tax the gains at a very high short term capital gains rate ....but...because of the capital loss carryforwards ...there are NO GAINS to tax ....
Thanks for the interesting article ...Regards - Mike
Equity CEFs: Eaton Vance Really Wants You To Own Its Option-Income Funds [View article]
Reply to kmbyrne4 : ROC or " Other capital " is probably the most contentious / misunderstood aspect of this fund ...with good and well intentioned folks inadvertedly giving out misleading information.
If this were a CMO bond ( collaterized mortgage bond ) or a simple aggregation of individual mortgages into a single bond paying interest ...the amount of principal that is paid back is distributed to the owners of the bond with each payment ... and attached with each interest payment ...THAT would be a Return of Capital ..essentially getting your money back and therefore non-taxable....You would see your $10,000 initial investment on your statement ....valued at say $2,000 after 5-6 years of duration ....as the mortgages were sold and capital returned. With ETY, on the other hand, they don't own any bonds in their $1.7 billion investment portfolio ...just Blue Chip stocks ...To make money each month ....The funds SELLS S&P 500 index calls ...80,000 -100,000 contracts each year ....taking in an Option Premium for each contract sold ...ETY management felt like it could generate or earn 10% of portfolio asset value each year by SELLING CALLS ....but that will vary with the market ...and the fund sells approximately 50% of its asset value to Index calls ....it can easily raise that percentage of coverage to 60-75% if necessary and to meet the dividend distribution ...more Calls = more Premium received ... In a flat to good market ...( moving slightly upward ) ...ETY will CLOSE out these index contracts after just 2-3 weeks of duration and then SELL a new series of Calls for the next month ....They reported taking in $90 million in premiums over the last six months ...but spending $106 million to buy them back a few weeks later ....This makes sense for the fund IF the underlying portfolio of stocks has APPRECIATED more than the $16 million in losses caused by closing out the option positions. ETY reports that it has $240,000,000 in portfolio unrealized gains ....so the overall GROWTH of the fund has been positive ...( over the last 6 months anyway ) In a bad market ...declining slowly for example ...the fund would simply pocket the $90 million of Index Option Premium received or a large portion of it after the cost of closing them out was subtracted...and this would help pay the large dividend distribution ...but the underlying stock portfolio would decline in value .... In a really bad or really good market - ETY will ALWAYS underperform ... as closed end funds get sold off and " hammered " by sellers ...hence the large discount to NAV or fair curent market price of the portfolio ...the price swings being much more painful than a regular open-ended fund where those types of fund cannot be quoted or priced at anything other than the POP ...public offering price plus the sales load ...
Now ...to your question ...ETY produces about 86% of its 2012 dividend distribution as ROC or " Other capital " that is non-taxable ...Is this just your original investment being returned to you like with the CMO bonds mentioned earlier ? ....NO ....
ETY is making the dividend distribution from selling appreciated stock positions ...which create CAPITAL GAINS ...but the fund has over $400 million dollars in Capital Loss carry-forwards from 2007- 2008 to " wash " against these 2012 Gains ...hence ..ZERO taxation on the 86% portion of the 2012 dividend that came from capital gains ...This will extend thru 2018 according to tax regulation or if the fund generates more Capital Gains than the $400 million in loss carry forwards on the books ...( unlikely )
Think of the 86% non-taxable portion of your dividend distribution as " Other Capital " ....not ROC ...Mutual funds, by law, pass thru to the shareholder the interest and capital gains / losses incurred minus their expenses of course .... Finally ...owning ETY is NOT a suicide pack of investment dicipline ...Like most investments; it requires the time and attention to monitor the quarterly and annual reports ....if the portfolio value shrank radidly, the fund reports large losses instead of gains, if the option market cant or wont produce the amount of premium necessary to pay the 10.5% monthly dividend ....then its time to re-evaluate why you continue to place " at-risk " money with the fund .... In the past, ETY management has reduced the dividend from soemthing like $0.40 per quarter to $0.253 per quarter, reflecting the market and the inability to sustain such a large quarterly distribution ...remember their target was 10% annualized distribution when they started ....and they reduced the dividend to about that sustainable level ...the point being that fund management is proactive and even quick to react to market conditions ... Summary - good fund to HOLD and selectively add to positions at advantegeous circumstances ...( -15% discount to NAV or big market down days ) hope this helps explain things better ...LOL
Newfound Billions Of Barrels Of Shale Oil In Newfoundland [View article]
My question is simply this : Why have they NOT signed up a "fracking-experienced " company to expedite the process ...Parker Drilling for example ( still holds the world record for horizontal drilling ) ...and I understand the shale formation is almost 10 x thicker than the Pennsylvania formation it is most often compared to ... I ask this as it seems likely that SHPNF will need both a fracking formula AND a horizontal drill team to maximize any commercial development of their non-production leases ...( devleopment only so far ) .... The deep water St Georges bay has docking facilities ( old but serviceable ) that would accomodate barges and medium tankers for the trip to the Come by Chance refinery ...or just use the TCH highway system to truck it there ...about 500 kilometers ...The old US Air Force base there has plenty of old ( but repairable ) storage areas to store the oil ....dozens in fact .... The HUGE airport ..located 5-6 miles from the drilling site makes for easy tranportation in and out of the area ... This seems so basic and fundamental ....it concerns me that the company management has not signed up the requisite partnerships ....its been a long time ....There is no way, given the limited / weak financials of SHPNF, they can hope to do this themselves... the expertise / knowledge of just horizontal drilling is more art than science ( quoting Bobbie Parker of Parker drilling ) ..and the fracking is another dicipline into itself ....add in the 10 x tougher / deeper more complex shale formation ...and SHPNF has already ruined / lost a hole during their completion process ....and you get an equation where the oil may be there ...but we have the wrong talent / capability in place to get it in production. Why ...have they not brought in the experts ? get a loan from the World bank ...( See Peru oil development - BPZ ) ....Get George Soros to invest ,,,as he has several other oil development plays ...Get the financial backing / parnerships ....and get the Texas boys on the next flight out of Houston ...the stock would jump on that news alone ...Thx
Equity CEFs: The Insanity Of CEF Investors [View article]
Reply tp papaone -
Thanks for your comment and in reply to your question, Yes ...I would consider ETY as an investment source of monthly retirement income.
Here are some quick bullet points in favor of the fund:
1. Fund contains 121 individual stocks - mostly blue chips and 75% US corporations - no bonds or complicated wall street instruments that seem to fizz out unexpectedly.
2. ETY is still on sale ...you are getting about a 10% discount with this market price ....it has been higher ...but 10% is not too shabby.
3. ETY management just reported the results of their 10% share buy back thru Feb end ...They have purchased around 2,700,000 shares of the fund or 1.77% of the 10% authorized ...this has driven down the discount from 14% to the 10% level today ...along with the favorable markets of course ...they are booking a 14% GAIN on the transaction ...wow ...fewer shares in the market ...usually means higher prices for us ....it also shows that fund management is serious about making the fund attractive and interesting to new investors.
4. We still collect monthly income that annualizes at 10% based on current pricing ...thats hard to pass up when compared to other more traditional income investments like CD's or muni bonds ...
5. About 85% of the income paid out in the dividend distributions are non-taxable ...whereas ... interest income and standard dividend income are very taxable ....
6. YES ...The cost basis of your investment is likely being reduced by the return of capital aspect ....but ... that just impacts your overall capital gains / loss calculation when you physically SELL the fund ...and with the market price rising slowly ...you may well have a capital gain ....several years from now when you sell out ...but not much of a tax headache now ....pay taxes LATER ...
Equity CEFs: The Insanity Of CEF Investors [View article]
By IRS and accounting rules, the $450,000,000 capital loss carryforwards will " expire " and become useless to ETY management . My contention has been that fund management could and should " wash " future capital gains against this large carryforward loss amount ...thus creating a flow of tax free / non cost basis adjusting income to holders of the fund.
Instead ...ETY is boosting the amount of unrealized capital gains in the portfolio ....which certainly makes them look good ( on paper ) but forces us into a cost basis reduction as the fund returns principal to us each month ....when they could simply use capital gains ...
Its an interesting tactic ....along with the switch to monthly dividends and the 10% share repurchase plan ....to make the fund all the more attractive to new investors ...
Nothing particularly bad or wrong here ....and we will see the semi-annual report in mid-April which should detail the changes in the portfolio from November 2012 ....
They are being very clever ....perhaps too much so ....and that has me concerned.
Equity CEFs: The Insanity Of CEF Investors [View article]
Good afternoon all ...
I think the reality is that ETY, with a portfolio turnover of 30% in fiscal 2012, was simply pruning out the weaker holdings in the portfolio of about $1.6 Billion ...to create a net proceeds of approx $480,000,000. ( 30% of $1.6 billion ) The fund has a managed distribution policy that requires an annual dividend distribution rquirement of around $150,000,000 ( ish ) ....and they get approx $15-17 million net after expenses to pay out as dividends ....leaving them with a " nut " of about $135,000,000 necessary to pay the annual dividend distribution.
ETY stated in its audited annual report that its Unrealized Capital Gains in the portfolio had increased to about $250,000,000 and they still held about $450,000,000 in capital loss carryforwards on the books trhru 2018.
So ...in a nutshell ...ETY greatly increased its unrealized capital gains in 2012 ....sold off thru portfolio turnover about $480 million in net proceeds ...and made the $1.00 + 2012 dividend distribution.
Deductive reasoning indictates that this would lead to a Return of Capital from the principal invested ...since they didnt use any of the capital gains that could be offset by the huge amount of carryforward losses on the funds books....
The $250 million in unrealized capital gains makes the books look very positive and a vast improvement over past years ....the NAV is slowly but steadily increasing ...and we still get a bit over a dollar a share discount to NAV ....
It makes more sense in view of their recent campaign to improve the attractiveness of the fund .... share buyback ....switch to monthly dividends ....that EV fund management wants to show solid fundamentals and good performance of the underlying stocks held in the portfolio ....
I am a bit concerned by EV's lack of transparency about the on-going share re-purchase plan and their seeming stubbornness about making use of the capital loss carryforwards on their books ...guess they believe they have plenty of time to make use of them ....2018 at least ...
The net impact being that we will see the cost basis of our shares gradually reduced each month ....the good news for long term holders of ETY being that the original cost basis was $20 per share ....so we have a long way to go ....lol ...before this reduction would practically start to hurt us ....most of us having capital losses should we sell the fund in 2013 ....NOt gains ...
Oh well ...hope this helps explain what i believe they are doing
Equity CEFs: The Insanity Of CEF Investors [View article]
Reply to Ken Gold -
Thanks for your comment and observation...and I agree that some of this stuff does get complicated ...( like my comments )
I own ETY in several accounts from two brokerage firms ...so far at least ... they BOTH have correctly reported the distributions as non-dividend distributions on line 3 of the 1099-DIV ...and NEITHER firm has adjusted the cost basis due to these non-dividend distributions.
We started out this long discussion trying to define the ROC characteristics of the ETY dividend distribution ....with many posters to this board claiming that cost basis MUST be reduced at the time of sale ....because of the return of principal aspect ....
My contention, all along, was that the correct cost bais information was being calculated by the fund and brokerage house and listed on the statements ....
I plan to simply go along with the reported information on the official 1099 forms ....which carry the HIGHER cost basis number. This way ...my 1040 Schedule D form will EXACTLY match the information provided by the brokerage firms to the IRS.
The folks making all kinds of manual adjustments to the cost basis ...from the 25 dividends paid since the inception of the fund are in for a " world-of-hurt " from the IRS ....It will be a simple catch for their computer system ...as the numbers submitted dont match. This could and should trigger an automatic " review " letter and request for supporting documentation.
Good luck with that ....
My arguement in a nutshell - Capital Gain distributions are NEVER considered a return of capital ...capital Loss carryforwards are required to be washed against future gains ....netting ZERO taxation until exhausted or expired ... Further ...Capital gains cannot be used to adjust the cost basis ...they are taxed separately.
Equity CEFs: Eaton Vance Really Wants You To Own Its Option-Income Funds [View article]
Saw your comment and wanted to illustrate an answer to show why these Option Income funds are not necessarily "removing equity from the fund" as you mention.
First aspect to consider is that there are TWO separate equity investments here ...ETY holds common stock and SELLS S&P 500 index calls each month ....two separate items that are taxed and distributed ...so ..unlike a CMO bond for example; where they distribute a good portion of principal as ROC each month as the underlying mortgages are paid back; Option Income funds are Selling Calls (ETY) each month and closing out 90% + of them every 2-3 weeks ...
ETY recieved about $90 million in Option premiums over the last reported six months doing this ...but spent over $103 million closing them out ....creating an estimated $13 million loss - taxed at 60% long term losses and 40% short term losses ....
Now ...ETY has about $1.6 billlion invested in the stock market ...mostly in blue chip companies like Apple / Exxon ....and that portfolio value went UP during the same six months ....much / much more than the $13 million loss ..( they hold $60 million of Apple stock for example which went up significantly )
This portfolio value increase was measured in their last six month report at + $250,000,000 ....in NUA ...net unrealized appreciation.
These funds typically use a so-called managed distribution process to pay out their respective dividends which allows the fund to pay out their dividend distribution on an equal basis ....and provide some certainity to investors about the dividend cash flow ....so ...where does the money come from to pay out the huge distribution ?
Three places -
1. The dividends the portfolio generates ..but that cant typically be more than 2% per year ...( and portfolio expenses are paid from dividends recieved so that leaves about 1% for investors )
2. In a declining market ...the option premiums received for selling Call options can help pay for the distribution ....ETY needs about $187 million each year to pay an 11% annual distribution ....and the last six month report showed they booked $90 million in premiums ...hmmmmm...but then closed out that with a $103 million buy back ....
3. They use appreciation in the stock portfolio to pay the huge distribution ....and they have about $250 million on hand ( today ) to do exactly that ....lol ....
When there is no appreciation in the portfolio ....the Option premiums received will help offset the cost of the dividend distribution ...as the fund management will not be closing out the CALL options ...as they will be profitable ....
The IRS loves short term transactions ....they get to tax them at the HIGHEST possible personal income rate ....BUT ....wait ...these funds all have a huge anount of capital loss carry-forwards from 2007 / 2008 to wash against these new capital gains ....netting in a ZERO TAXATION .....until 2018 when the carry-forwards will expire ....( whew ...lot to explain )
So ....the net distribution from funds like ETY are classified as 90% " Other Capital " ....and is non-taxable ...where the remaining 10% is dividends and interest ...which is taxable ...
Bottom Line - The fund is NOT eating itself up with return of capital like a mortgage bond does ....you get some downside protection in the market as the fund is Selling index calls each month ...and upside potential as the fund closes out these Calls every 2-3 weeks for a loss when the market is good ( going up )...and you are buying the fund at a 13-15% discount to its actual underlying value ....
Hope this helps explain ....regards
Equity CEFs: Eaton Vance Really Wants You To Own Its Option-Income Funds [View article]
I believe that current tax law allows for a 60/40 split of long and short term gains classification of the proceeds ....( similiar to commodity contracts ) which allows a super short holding period such as the 2-3 week average duration that ETY uses as a typical holding period for the 80,000+ S&P call contracts it buys and closes out each year.
Also ...you didnt mention the HUGE capital loss carry-froward these funds and ETY have on the books thru 2017 ...ETY has approximately $500,000,000 in capital loss carry-forwards to " wash" against future capital gains ....so ....investors can look forward to ZERO taxation on capital gains thru 2017 in this fund ...only paying taxes on the stock dividends actually credited from the portfolio ...lets call it 10% of the 2013 estimated distribution ...$1.01 per share x 10% = $0.10 ....x your income tax bracket rate ...lets postulate 28% on average = a federal tax obligation of $0.028 per $1.01 in cash actually recieved in 2013 or a measley 2.8%.
Comparative investments in dividend paying stocks / ETFs or dividend capture mutual funds WILL be taxed at your ordinary income tax rate up to 39.6% ....plus the 3.8% Obamacare tax for income over $388,350 in 2013.
So ...investors in the option income funds will pay NO capital gains taxes for years ...and typically less than 3% on the total distribution paid out in 2013 ....Investors in CDs / Money market funds / rental income / ordinary dividends / preferred stocks will be paying typically 25-35% of the proceeds they recieve in 2013 ...
This aspect gives the so-called Option Income funds a compelling advantage in the coming years ...( at least until 2017 )
Thx - look forward to your response - Mike
Equity CEFs: The Insanity Of CEF Investors [View article]
I pulled my 1099-Div statements from 2011 and 2010...just to be precise and avoid any mis-information.
line 1a - total ordinary dividends ( includes 1b ) $5,503.22
line 1b - Qualified dividends ......................... $1,862.43
line 3 - Nondividend distributions ...............$4,038.87
In the detail breakout section for Dividends and Distributions
ETY - CUSIP # 27828N102 -02/28/11 - $6.43 - Qualified dividend
02/28/11 -$662.60 - nondividend distribution
This was repeated for the remaining three quarterly dividends paid in 2011....
The net result being that ETY created a qualified dividend stream to me in 2011 of $26.78 ....and taxable at 15% back then ...so $4.02 of the $26.78 was required for federal taxes due ....
ETY also contributed $2,759.65 in completely non -Taxable, non dividend distributions ....
ETY distributed ZERO short or long term capital gains ....ZERO / ZIP / NADA ...in 2010 or 2011. ( because the capital loss carryforwards washed all capital gains away )
The Summary also had this listed :
Return of Principal distributions ......................... $0.00
Basis Adjustments ......................... ..................$0.00
Summary / opinion - I paid $4 in federal income taxes on cash received / reinvested of $2,786.43 ...Thats about a 0.0144% rate ...( check my math but $4 on $2786 is way less than 1% )
Less than the cost of the " meal deal " from Subway ...or a Happy Meal at McDonalds ....got me $2,782 in net tax-free Income.
To be extra -certain ; I checked the other brokerage account where I have ETY ....at a different firm ....and saw the exact same accounting result and methodology ....
No ROC / No Basis Adjustments ....This is just Other Capital or non-dividend distributions ....
As I stated before; this is not some sleazy accounting gimmick ..Its actually the only way to account / pay taxes correctly on the distributions from this security....
If ETY didn't have such a huge amount of capital loss carryforwards ...I have no doubt that much of this income would have been classified as short and long term capital gains ....and taxable at a very high level ...plus potentially Obamacare investment tax depending on your income ...( 3.8% more potentially )
My guess is that we will have 3-4 years of this super-favorable tax treatment ...and then face the consequences of high taxation that our lawmakers have bestowed upon us ....
As more and more people figure this out ...I predict that there will be a migration from high tax funds ....to these high yield / low tax funds ...not just ETY ....but that's the one Option Income fund I own...lol ...so I am hoping the renewed interest will stimulate buying and move the market price even higher ...
Hope this helps ...I really tried to make it understandable and specific ...we still have market risk and plenty could go wrong in our investment thesis ..but I am looking for + 20-25% from this fund in 2013 ...we almost got that much last year alone ...
regards -
Equity CEFs: Eaton Vance Really Wants You To Own Its Option-Income Funds [View article]
My contention, which may well be incorrect, is that NO ADJUSTMENT of cost basis is necessary with ETY....this is important because many potential investors would be loathe to try and figure out such an adjustment and perhaps fear some type of IRS challenge to any guestimates they might, in good faith, try to apply to the basis ...thus intimidating them away from this type of fund. ( who wants IRS problems ? or to try and calculate the basis reduction ? ...not me ) One of the points to owning a mutual fund is to let them figure out the taxation stuff ...lol.
ETY started out in 2006 with a professional Options Advisor that essentially charged them a fee to WRITE CALL options against the portfolio holdings each month ....The thesis then was that exercised call options had the premiums received ADDED to the option strike price to calculate a capital gain ...( typically short term with ETY ) ...no adjustment to the cost basis was allowed or necessary under tax law ....premiums just increased net proceeds.
Later, ETY management decided to FIRE the Options advisor and revert to exclusively writing WRITING S&P index calls at the next higher strike price from the prevailing market EACH MONTH ...and then ...CLOSE out the transaction typically within two-three weeks ...and repeat the cycle ....SELL / CLOSE ...
The six month report in April, 2012 shows ETY recieving $90,698,884 in S&P Index call premiums ....BUT ....paying $104,386,575 to close out the majority of these positions ....lets postulate a ( $13,687,000 ) LOSS over the preceeding six months.
This was fine and dandy ...because the overall portfolio value was appreciating with the market ...much more than the $13.6 million loss ....
ETY management has been using the IRS rule 1256 tax treatment of equity index options where even short term holdings of Index options were taxed at 60/ 40 ...60% long term / 40% short term ....so an investor in the 25% tax bracket would still get a net 19% capital gains tax rate on short term transactions using equity index options. ( whew )
The REALLY interesting part, however, is that ETY is managing to book a raw LOSS on virtually their entire S&P index option trading ...estimated to be approximately 100,000 contracts each fiscal year ....because, in a rising market, it just makes a ton of sense to close out the index options each month, book a loss, and let the stock portfolio continue to appreciate ....ETY reported in April that they have $251,000,000 in NUA ....
So ....they have nothing to " adjust " ....and INCREDIBILY this trading at a loss tactic even ADDS to the future capital loss carry-forward amounts ...( hard to believe ...but true )
These guys are even booking NUA from their share re-purchase program ...showing a +3.45% gain in the Nov 5 update ....just on ETY.
This entire ROC debate is clouded with confusion ....PUT contracts do have a basis adjustment / bonds have an ROC component ....but ....NOT CALL contracts ...The IRS allows the term " OTHER CAPITAL " on the brokerage 1099 statements which is non-taxable ...and ETY uses this avenue to provide year end tax reporting ....OTHER CAPITAL, from the option premiums for example, can and will be taxed at the Short Term / Long Term rates ( which the IRS LOVES ) ....BUT ....when the fund has $445 million in carryforwards and is losing money on their Index Option trading each year .....there is literally NOTHING to tax.
Again, not to be arguementative, but I would never own a mutual fund where I had to guestimate or adjust the basis ...and even long term holders of the fund should have a plan to SELL ....perhaps if the fund moved back to a premium to NAV ? ( a + 10% Premium would force me to sell for example ) ....
Appreciate your article and quick response ....Thx - Mike
Looking Closer At The Closed-End Buy-Write CEFs [View article]
1.No adjustment of cost basis is required as the fund ONLY sells S&P 500 index CALLS against its portfolio. ( approx 70,000 contracts per year ) - PUT contracts are different but since the fund management does not use that strategy ...no point in discussing.
2.When call contracts are exercised ...the premium is tacked on or added to the strike price and the net proceeds are taxed as Capital Gains ( typically short term and at a very high rate ) - Index calls, however, are subject to the raw 60/40 - long / short term tax treatment regardless of holding period - even one or two days of duration.
3.The average holding period / duration for ETY index call contracts is TWO WEEKS ...and they close out 90-95% of their open positions for a loss or a gain ...then SELL another months CALL options at the next closest strike price out-of-the-money ...so ...12 times each year they ' reload ' S&P 500 Index calls....Individual investors seeking to replicate this tactic would necessarilly expose themselves to " UNLIMITED RISK " that a short / naked index option provides ...( suitability / financial resources / experience and the necessity of having a large asset base would preclude most small investors from such a naked strategy ) and would almost certainly guarantee a major hit should the underlying market make a sudden move upwards ( + 244 points on Dow the other day for example )
4. Leverage - Closed End funds typically borrow heavily to magnify their positions and then issue preferred shares to further amplify the risk / reward equation. ETY does not use any significant form of leverage or borrowing ...( many CEF's wind up having an aggregate 50% overvaluation due to this type of risk and makes them subject to large and distressing price swings ...especially in down markets.)
5.Liquidity - ETY has approximately $1,700,000,000 in assets and an average volume of 400,000+ shares per day ....In a tight / down market, smaller CEFs will experience problems executing orders...not so with larger funds. ( ever recieved a " nothing done " or stock ahead notice ? )
6. Capital Loss Carryforwards - probably the secret weapon for investors in the coming years ...ETY has over $445,000,000 in carryforwards and investors buying the fund can participate in these carryforward losses thru 2018 ...thus avoiding the "taxmaggedon" that our intrepid lawmakers have in mind for us in six short months.
7. ETY publishes the estimated tax characteristics of each distribution quarterly and sends a separate letter / notice of distribution to each shareholder. Thats how we know that the ytd estimate of ROC is 87% of the total distribution ( unaudited )
6.Discount to NAV - a 15% discount in buying shares of APPLE / EXXON / COCA-COLA / JP MORGAN /PFIZER / IBM / AMAZON and McDonalds which compose the largest positions in ETY make this fund worthy of consideration ...if the discount expanded to 20% to NAV ....the fund would be more attractive for investors like me ...conversely ...a few years ago ...ETY was trading at a PREMIUM to NAV ...that is a danger / warning sign of overvaluation.
7. Anger / brokerage statements - many investors purchased this fund on the IPO and paid $20 per share ....when they see the monthly statement - ETY is typically the " BIGGEST LOSER " by a wide margin ...$11 per share loss / into a $20 purchase price = a raw 55% loss despite the significant market rally since March 2009.
Especially true if they have been taking cash from the distributions instead of reinvesting the dividends ...plus it seems that every time fund management reduces the dividend ...the market price takes a big hit ...( again ) ...even dividend reinvestments show up on the statement as new purchases in a fast declining market price ..( ouch ) - The net result being a distortion to the extreme of the actual LOSS taken ...
Summary - ETY is invested in large cap ( blue chip ) US companies to the tune of 77.8% of total portfolio and another 6.9% in the UK ...so it can be considered a proxy most similiar to the S&P 500 index ...with a bit more concentration ...if an investor believes that the US economy will rally, especially the cash heavy companies like APPLE / EXXON ...its a good way to participate in a very impressive stock portfolio ...AND ...use the naked index CALL strategy that most small investors are loathe to risk ....AND ...when everyone else in the US is paying 33-43% federal taxation on their distribution of income and capital gains in 2013 ...we will be paying Federal taxes on roughly $0.13 of every dollar of income distributed from ETY in 2013.( assumes 87% ROC ) Even at an average 40% mandatory tax rate that works out to $0.05 in tax due for every DOLLAR we earn ... and that makes these so-called Buy-Write funds a compelling story ...
Hope this helps - your comments appreciated - Mike
Equity CEFs: Eaton Vance Really Wants You To Own Its Option-Income Funds [View article]
Thanks for your reply and question.
The answer is on page 13 of the semi-annual report to shareholders- Section D - Federal Taxation - ETY has $445,775,309 in capital loss carry-forwards that can and MUST be applied to capital gains going forward ...I did note that the capital loss carryforwards were itemized by expiring year ...and that $53,547,524 will expire, if not washed against capital gains at the end of 2018.
In my opinion; this is HUGE ...as investors; we can anticipate a full SIX YEARS of paying little to no capital gains taxes from this fund, regardless of tax rates or increases that may be imposed ...because fund management gets to " wash " their past capital losses against future capital gains thru 2018.
Many mutual funds have aggregated tax loss carry-forwards on their books and ETY is no exception ...its just that they have $445 million ...lol ....
If you had a choice of buying a new issue mutual fund that did the exact same thing and the identical trading strategy as ETY ....you would essentially get " clobbered " by huge capital gains taxation ( assuming the fund had a good year ) ....because capital gains, especially short term capital gains ...are designed to be taxed at a very high rate ...estimated 30% under the President's proposed tax plan ..( ouch ) ...but by using some of the older funds which have built in capital losses that can be washed against gains ...you will pay ZERO capital gains ...NADA / NUNCA / ZIPPO ....LOL
Its an unintended benefit of coming out of a recession and having big losses ...( who didn't in 2008 ? ) ...and probably the reason the Federal government will get no where near their tax revenue projections from raising the tax rates as they expect ....Investors will have capital loss carry-forwards from all those investments that tanked back in 2007 / 2008 ....
Why would you pay a 30% tax on your at risk gains ? ..when you could pay ZERO ? and get some benefit from all the losses endured a few years ago ? ...
Hope this helps ..and thx for the comment
Equity CEFs: The Insanity Of CEF Investors [View article]
My brokerage statement shows a long term unrealized capital loss on the investment of ($8,248) ...making ETY one of the biggest LOSERS in my portfolio ...
But wait ...I have $3,614 MORE dollars of current value than on DAY ONE of the IPO .....how can that be possible ?
The accounting rules treat each dividend reinvestment of new shares as if you wrote a new check for the purchase ...
Over time ....we have collected numerous dividend checks resulting in many / many new shares of ETY ....The new aggregate number of ETY shares, even at $10 per share ...is greater than the initial investment ...by about $3,614.
So .... I could SELL my shares of ETY and realize a Capital Loss of $8,248 ....wash that loss against any other capital gains I may have had ...reducing my tax bill by about $2,000 ( 25 % tax bracket ) and still have $3,614 more dollars than when I started....call it a $5,600 hard dollar gain ...thru one of the worst recessions in US history.
Not too shabby ....
The simple truth is that if you purchased ETY on the IPO ...and reinvested your dividends ....you have MORE money or cash value today than when you started ....not rocket science ...but it " beats-the-sox off " actually losing money ....
Now your arguement against ETY is that ..." well, yes I made some money ..( + 6-7% net ) ...but I could have done better buying something else ..."
Ok ...you got me ....( said in good humor and not intended to be offensive )
Hope this helps explain why so many people pour HATE on the fund ....the monthly statements really do show this investment as a huge LOSER ....despite you having more money than when you started ...
You just gotta love accounting ....
Regards - Mike
Equity CEFs: The Insanity Of CEF Investors [View article]
1. The fund holds two distinct types of securities ....common stock and S&P 500 index options ...exclusively CALL options.
2. IRS tax law regarding index options was settled in the early 1990's by the US Supreme Court ..They are specificly treated as Section 1256 contracts where the holding period or duration of the contract does NOT determine long or short term gains ...rather a simple 60% long term / 40% short term formula is applied to all GAINS from the proceeds of the index option transaction. So ...a one day or one hour duration still gets you 60 / 40 tax treatment.
3. Here is an example: if you re in the 25% bracket, the effective rate on short-term gains from trading in these options is only 19% [(60% x 15%) + (40% x 25%) = 19%]. That s a 24% reduction in your tax bill.
4. ETY is Selling and Buying back over 80,000 S&P 500 index call contracts each year ....the KEY terminolgy to keep in mind is that any GAINS or LOSSES are treated as CAPITAL GAINS / LOSSES... and MUST ( by tax law ) be accounted or " washed " against previous carryforward losses in the fund ..ETY has about $450,000,000 in REALIZED losses from 2008 ...
5. Every dollar of gain from the investment portfolio must be " washed " against that huge carryforward loss number thru 2018...before we get the first penny of capital gains taxation.
6. Now ....to your question of ROC ....lets postulate that ETY has paid out about $9.40 of dividend distribution since inception ...with about 90% of that being called Other Capital or ROC depending on your brokerage firm 1099 form. So call it $8.40 per share of ROC to reduce your cost basis ? That would impute your true cost basis to around $1.60 per share ....with ETY trading around $10 per share. Hmmmmmmm....sort of a " Roll your own " cost basis depending on your purchase date ....what a potential disaster of accounting / reporting that would be .....especially with the IRS requiring that cost basis information be included on every 1099 report of proceeds this year ....( an impossible task given this premise of reducing the basis by ROC and the literally tens of thousands of share holders in the many different option income funds )
7. Secondly ...realize that the 80,000 plus Index call contracts the fund is selling and closing out ( usually within 2-3 weeks ) are NOT related directly to the portfolio ....the index options are settled in cash ...you cant simply deliver shares of stock to pay for them or have your Apple shares called away in an exercise so to speak ...The option contracts are separate securities ..from the stocks held in the portfolio ...and MUST be taxed as capital gains / losses as mentioned above. These are literally " naked " or uncovered option positions ....and most investors would not qualify or be considered suitable to trade " naked " S&P 500 call options ..( ask Doug how many times he has gone " naked " with index options for himself or his clients ? ...doubt he does it much..if at all ) The maximum loss potential alone would give pause to any investment advisor or client ....
8. ETY employs Deloitte & Touche as their auditors and they certify the annual reports and the accounting methods used ....Under the Securities Act of 1940 this is a mutual fund ...where gains / losses and income are " passed -thru " to the owner or shareholder minus of course the funds expenses ....Deloitte & Touche DO NOT report any potential cost basis reduction in ANY of their quarterly / semi annual or annual reports ....since inception.
9. ETY was incepted with an Options Advisor firm essentially doing "covered calls " against the portfolio positions ....they later FIRED that firm ...and adopted the index option CALL tactic ...it was cheaper and much more tax efficient. But ...lets assume that the fund had continued to use a " covered call " strategy instead of the " naked " index calls ....when exercised ...the premium recieved is simply ADDED to the Strike price of the exercised call option ..no adjustment of cost basis is allowed / permitted ...even then.
10. Finally ..ETY was created to provide high income with tax efficiency ...with potential price appreciation in the portfolio as a secondary target ....Nobody in their right mind would want to own a fund where there were cost basis adjustments 12 times per year ( monthly dividends ) or where the IRS could swoop in and smash you with a huge capital gain tax bill at their lesiure ....by that same thinking ...no one would own Commodity or index option contracts...which is why the Section 1256 rules were instituted in the first place ...orderly / simple / efficient accounting rules to regulate the fast growing commodity / broad based index option market.
11. I think that anytime a document or author mentions the character and risk features of standardized options ....the default language is written to cover every base ..CALLS / PUTS / Index ...and subsequently there is mention of potential cost basis adjustment ...( exercised PUT contracts have that feature for example but CALL options absolutely do NOT ) ETY exclusively uses index CALL options ....so cost basis adjustment is not a consideration.
12. This is not simply some accounting " gimmick " or slick way to avoid " fair share " taxation ....the IRS loves to tax us at the short term rate ....and sometime in the future ...( 2019 ? ) ...ETY may start producing tons of capital gains taxation ...and we will be facing a 19% blended tax rate on the 85% of the annual dividends we receive from the fund plus the dividend tax rate on the other 15% ...( 25% tax bracket assumption ) ....that will be a so-called " Chappaquiddick " moment for all of us ...." we will cross that bridge when we come to it" ...lol
In the interim ....enjoy the anomoly of the large tax advantaged dividend distribution ( 10% annualized ) , the discount to NAV, and the potential of real growth in the portfolio ...and the approximate 4% Federal taxation rate ...
When its over... we wont see this type of tax advantaged income for quite some time ....
Hope this helps explain the ROC issue ...thx
Equity CEFs: The Insanity Of CEF Investors [View article]
1. ETY purchased about 1.5 million of its own shares during Sept & Oct 2012 and was booking for accounting purposes some nice short term unrealized gains ....They stopped reporting their monthly purchases after the Nov 5 announcement ...but by my estimate...they have the authority to purchase another 9% of the outstanding shares of the public float in the market which should further reduce that large discount to NAV, and improving the market price ...Interesting that they stopped doing public disclosure monthly of their re-purchase activity...we will have to wait for the semi-annual report to update that buying activity.
2.We recently passed the Jan ex-dividend date for the first monthly distribution ....and the fund's market price held steady ...even moved up along with the market a bit. While early, this may be vindication of fund management's decision to go to a monthly distribution vs quarterly. In the past, we were whip-sawed by price movement / volume around the ex-dividend dates ...as I believed the dividend " chicken-hawks " would swoop in ...buy the shares and then dump them within a few days / weeks ....Looks like this day-trading has slowed down or even stopped ...and thats good news for the longer term holders.
3. Another unintended consequence of the disastrous markets of 2007-2008 is the reality that many mutual funds, but particularly CEFs have huge / outsized capital loss carryforwards to wash against future capital gains for 4-5 years going forward ....ETY has approximately $450,000,000 for example ....on a fund with $1.6 billion in assets ....( AWP has $1.2 Billion with only $666 million in assets ) This is a huge advantage for new investors who can buy the fund and effectively pay ZERO capital gains taxes for 60 or more months ....the only taxes would be on the dividend stream earned by the portfolio itself ...about 15% of the 2012 distribution ..call that about $1.04 per share so ( roughly ) $0.88 is considered Other Capital and $0.16 is taxable ...say at 25% Federal rate = you owe the IRS about $0.04 for every $1.04 in distribution received ...an effective rate of 3.8% ....thats real tax efficiency.
4. Comparing ETY with municipal bonds in a tax advantaged account ....ok ....10 yr maturity / AAA muni bonds are yielding 2% and that would be tax free ...so after 10 yrs investment duration...you would have about $12,201 in total return value with the AAA muni ..( unless, of course they were Stockton CA or any Chicago / Detroit bonds ...where zero is a more likely investment result ) ....ETY ...with market risk and assuming the same $10,000 investment and an exactly FLAT market price over the entire 10 yr duration...but with monthly dividends of $0.083 ...would have a value of $19,960. And ...what if the market return was greater then zero % for the next 10 years ? say a paltry + 5% annualized ? ( we did after all just book a +16% 2012 ) well ...your value would be $29,358 ...I understand the premise that tax free investments inside a tax sheltered account don't make a lot of sense ...ETY is tax advantaged, not tax free...and its defensive / cautious tactic of using S&P index calls to partially protect the portfolio make it a good choice for IRA accounts ( in my opinion ) just as the Feds ALLOW covered call writing inside IRA accounts as a " conservative income strategy "
5. Lastly, There will be NO ADJUSTMENT of COST BASIS with this mutual fund because of ROC or OTHER CAPITAL received ..Its an accounting nightmare and an urban myth that has impeded the performance of the market price. The tax law on index options was settled in the US Supreme Court back in the early 1990s ....think about it ....the thousands of ETY shareholders artifically reducing their cost basis by a made up number ...The IRS trying to determine the exact cost basis ...ETY reporting by 1099 a totally different number ??? It would be a disaster ...and an open invitation to an IRS audit ...every year. ETY is closing out 95-97% of their Index Call options each month ...TAX LAW calls this a capital gain or loss transaction ....no adjustment of cost basis is allowed or permitted ....( that happens with PUT contracts ) ...ETY is therefore " washing " any generated capital gains from the sale of stock or index option transactions AGAINST carryforward capital losses with the net result being ZERO capital gains ...and no capital gains taxation for the next 60 months ...at least.
This inherent debate over ROC / OTHER CAPITAL continues to "dog" the fund...first it was that the fund was cannibalizing itself with excessive distributions that would lead the NAV to zero in a few years ....( AOD anyone ? ) ...then this mantra of "reducing the cost basis " amount of non-taxable income paid ....started to appear on discussion boards and in articles ....NEITHER is true ....but this ROC debate is particularly deceptive ....and inaccurate. The IRS absolutely loves the tax structure of these Option Income funds ...they get to tax the gains at a very high short term capital gains rate ....but...because of the capital loss carryforwards ...there are NO GAINS to tax ....
Thanks for the interesting article ...Regards - Mike
Equity CEFs: Eaton Vance Really Wants You To Own Its Option-Income Funds [View article]
ROC or " Other capital " is probably the most contentious / misunderstood aspect of this fund ...with good and well intentioned folks inadvertedly giving out misleading information.
If this were a CMO bond ( collaterized mortgage bond ) or a simple aggregation of individual mortgages into a single bond paying interest ...the amount of principal that is paid back is distributed to the owners of the bond with each payment ... and attached with each interest payment ...THAT would be a Return of Capital ..essentially getting your money back and therefore non-taxable....You would see your $10,000 initial investment on your statement ....valued at say $2,000 after 5-6 years of duration ....as the mortgages were sold and capital returned.
With ETY, on the other hand, they don't own any bonds in their $1.7 billion investment portfolio ...just Blue Chip stocks ...To make money each month ....The funds SELLS S&P 500 index calls ...80,000 -100,000 contracts each year ....taking in an Option Premium for each contract sold ...ETY management felt like it could generate or earn 10% of portfolio asset value each year by SELLING CALLS ....but that will vary with the market ...and the fund sells approximately 50% of its asset value to Index calls ....it can easily raise that percentage of coverage to 60-75% if necessary and to meet the dividend distribution ...more Calls = more Premium received ...
In a flat to good market ...( moving slightly upward ) ...ETY will CLOSE out these index contracts after just 2-3 weeks of duration and then SELL a new series of Calls for the next month ....They reported taking in $90 million in premiums over the last six months ...but spending $106 million to buy them back a few weeks later ....This makes sense for the fund IF the underlying portfolio of stocks has APPRECIATED more than the $16 million in losses caused by closing out the option positions. ETY reports that it has $240,000,000 in portfolio unrealized gains ....so the overall GROWTH of the fund has been positive ...( over the last 6 months anyway )
In a bad market ...declining slowly for example ...the fund would simply pocket the $90 million of Index Option Premium received or a large portion of it after the cost of closing them out was subtracted...and this would help pay the large dividend distribution ...but the underlying stock portfolio would decline in value ....
In a really bad or really good market - ETY will ALWAYS underperform ... as closed end funds get sold off and " hammered " by sellers ...hence the large discount to NAV or fair curent market price of the portfolio ...the price swings being much more painful than a regular open-ended fund where those types of fund cannot be quoted or priced at anything other than the POP ...public offering price plus the sales load ...
Now ...to your question ...ETY produces about 86% of its 2012 dividend distribution as ROC or " Other capital " that is non-taxable ...Is this just your original investment being returned to you like with the CMO bonds mentioned earlier ? ....NO ....
ETY is making the dividend distribution from selling appreciated stock positions ...which create CAPITAL GAINS ...but the fund has over $400 million dollars in Capital Loss carry-forwards from 2007- 2008 to " wash " against these 2012 Gains ...hence ..ZERO taxation on the 86% portion of the 2012 dividend that came from capital gains ...This will extend thru 2018 according to tax regulation or if the fund generates more Capital Gains than the $400 million in loss carry forwards on the books ...( unlikely )
Think of the 86% non-taxable portion of your dividend distribution as " Other Capital " ....not ROC ...Mutual funds, by law, pass thru to the shareholder the interest and capital gains / losses incurred minus their expenses of course ....
Finally ...owning ETY is NOT a suicide pack of investment dicipline ...Like most investments; it requires the time and attention to monitor the quarterly and annual reports ....if the portfolio value shrank radidly, the fund reports large losses instead of gains, if the option market cant or wont produce the amount of premium necessary to pay the 10.5% monthly dividend ....then its time to re-evaluate why you continue to place " at-risk " money with the fund ....
In the past, ETY management has reduced the dividend from soemthing like $0.40 per quarter to $0.253 per quarter, reflecting the market and the inability to sustain such a large quarterly distribution ...remember their target was 10% annualized distribution when they started ....and they reduced the dividend to about that sustainable level ...the point being that fund management is proactive and even quick to react to market conditions ...
Summary - good fund to HOLD and selectively add to positions at advantegeous circumstances ...( -15% discount to NAV or big market down days ) hope this helps explain things better ...LOL
Newfound Billions Of Barrels Of Shale Oil In Newfoundland [View article]
The deep water St Georges bay has docking facilities ( old but serviceable ) that would accomodate barges and medium tankers for the trip to the Come by Chance refinery ...or just use the TCH highway system to truck it there ...about 500 kilometers ...The old US Air Force base there has plenty of old ( but repairable ) storage areas to store the oil ....dozens in fact ....
The HUGE airport ..located 5-6 miles from the drilling site makes for easy tranportation in and out of the area ...
This seems so basic and fundamental ....it concerns me that the company management has not signed up the requisite partnerships ....its been a long time ....There is no way, given the limited / weak financials of SHPNF, they can hope to do this themselves... the expertise / knowledge of just horizontal drilling is more art than science ( quoting Bobbie Parker of Parker drilling ) ..and the fracking is another dicipline into itself ....add in the 10 x tougher / deeper more complex shale formation ...and SHPNF has already ruined / lost a hole during their completion process ....and you get an equation where the oil may be there ...but we have the wrong talent / capability in place to get it in production.
Why ...have they not brought in the experts ? get a loan from the World bank ...( See Peru oil development - BPZ ) ....Get George Soros to invest ,,,as he has several other oil development plays ...Get the financial backing / parnerships ....and get the Texas boys on the next flight out of Houston ...the stock would jump on that news alone ...Thx
Equity CEFs: The Insanity Of CEF Investors [View article]
Thanks for your comment and in reply to your question, Yes ...I would consider ETY as an investment source of monthly retirement income.
Here are some quick bullet points in favor of the fund:
1. Fund contains 121 individual stocks - mostly blue chips and 75% US corporations - no bonds or complicated wall street instruments that seem to fizz out unexpectedly.
2. ETY is still on sale ...you are getting about a 10% discount with this market price ....it has been higher ...but 10% is not too shabby.
3. ETY management just reported the results of their 10% share buy back thru Feb end ...They have purchased around 2,700,000 shares of the fund or 1.77% of the 10% authorized ...this has driven down the discount from 14% to the 10% level today ...along with the favorable markets of course ...they are booking a 14% GAIN on the transaction ...wow ...fewer shares in the market ...usually means higher prices for us ....it also shows that fund management is serious about making the fund attractive and interesting to new investors.
4. We still collect monthly income that annualizes at 10% based on current pricing ...thats hard to pass up when compared to other more traditional income investments like CD's or muni bonds ...
5. About 85% of the income paid out in the dividend distributions are non-taxable ...whereas ... interest income and standard dividend income are very taxable ....
6. YES ...The cost basis of your investment is likely being reduced by the return of capital aspect ....but ... that just impacts your overall capital gains / loss calculation when you physically SELL the fund ...and with the market price rising slowly ...you may well have a capital gain ....several years from now when you sell out ...but not much of a tax headache now ....pay taxes LATER ...
Best regards ...hope this helps
Equity CEFs: The Insanity Of CEF Investors [View article]
My contention has been that fund management could and should " wash " future capital gains against this large carryforward loss amount ...thus creating a flow of tax free / non cost basis adjusting income to holders of the fund.
Instead ...ETY is boosting the amount of unrealized capital gains in the portfolio ....which certainly makes them look good ( on paper ) but forces us into a cost basis reduction as the fund returns principal to us each month ....when they could simply use capital gains ...
Its an interesting tactic ....along with the switch to monthly dividends and the 10% share repurchase plan ....to make the fund all the more attractive to new investors ...
Nothing particularly bad or wrong here ....and we will see the semi-annual report in mid-April which should detail the changes in the portfolio from November 2012 ....
They are being very clever ....perhaps too much so ....and that has me concerned.
Regards
Equity CEFs: The Insanity Of CEF Investors [View article]
I think the reality is that ETY, with a portfolio turnover of 30% in fiscal 2012, was simply pruning out the weaker holdings in the portfolio of about $1.6 Billion ...to create a net proceeds of approx $480,000,000. ( 30% of $1.6 billion )
The fund has a managed distribution policy that requires an annual dividend distribution rquirement of around $150,000,000 ( ish ) ....and they get approx $15-17 million net after expenses to pay out as dividends ....leaving them with a " nut " of about $135,000,000 necessary to pay the annual dividend distribution.
ETY stated in its audited annual report that its Unrealized Capital Gains in the portfolio had increased to about $250,000,000 and they still held about $450,000,000 in capital loss carryforwards on the books trhru 2018.
So ...in a nutshell ...ETY greatly increased its unrealized capital gains in 2012 ....sold off thru portfolio turnover about $480 million in net proceeds ...and made the $1.00 + 2012 dividend distribution.
Deductive reasoning indictates that this would lead to a Return of Capital from the principal invested ...since they didnt use any of the capital gains that could be offset by the huge amount of carryforward losses on the funds books....
The $250 million in unrealized capital gains makes the books look very positive and a vast improvement over past years ....the NAV is slowly but steadily increasing ...and we still get a bit over a dollar a share discount to NAV ....
It makes more sense in view of their recent campaign to improve the attractiveness of the fund .... share buyback ....switch to monthly dividends ....that EV fund management wants to show solid fundamentals and good performance of the underlying stocks held in the portfolio ....
I am a bit concerned by EV's lack of transparency about the on-going share re-purchase plan and their seeming stubbornness about making use of the capital loss carryforwards on their books ...guess they believe they have plenty of time to make use of them ....2018 at least ...
The net impact being that we will see the cost basis of our shares gradually reduced each month ....the good news for long term holders of ETY being that the original cost basis was $20 per share ....so we have a long way to go ....lol ...before this reduction would practically start to hurt us ....most of us having capital losses should we sell the fund in 2013 ....NOt gains ...
Oh well ...hope this helps explain what i believe they are doing
Equity CEFs: The Insanity Of CEF Investors [View article]
Thanks for your comment and observation...and I agree that some of this stuff does get complicated ...( like my comments )
I own ETY in several accounts from two brokerage firms ...so far at least ... they BOTH have correctly reported the distributions as non-dividend distributions on line 3 of the 1099-DIV ...and NEITHER firm has adjusted the cost basis due to these non-dividend distributions.
We started out this long discussion trying to define the ROC characteristics of the ETY dividend distribution ....with many posters to this board claiming that cost basis MUST be reduced at the time of sale ....because of the return of principal aspect ....
My contention, all along, was that the correct cost bais information was being calculated by the fund and brokerage house and listed on the statements ....
I plan to simply go along with the reported information on the official 1099 forms ....which carry the HIGHER cost basis number. This way ...my 1040 Schedule D form will EXACTLY match the information provided by the brokerage firms to the IRS.
The folks making all kinds of manual adjustments to the cost basis ...from the 25 dividends paid since the inception of the fund are in for a " world-of-hurt " from the IRS ....It will be a simple catch for their computer system ...as the numbers submitted dont match.
This could and should trigger an automatic " review " letter and request for supporting documentation.
Good luck with that ....
My arguement in a nutshell - Capital Gain distributions are NEVER considered a return of capital ...capital Loss carryforwards are required to be washed against future gains ....netting ZERO taxation until exhausted or expired ... Further ...Capital gains cannot be used to adjust the cost basis ...they are taxed separately.
Thanks for your review / observations