CEFL: A 16.66% Monthly Yield For Income Seekers

About: UBS ETRACS Monthly Pay 2xLeveraged Closed - End Fund ETN (CEFL)
by: Power Hedge

Closed-end funds are a popular vehicle for income investors due to their high distribution yields.

CEFL allows for investors to double their returns on a basket of closed-end funds.

The index upon which the note is based has delivered adequate performance over the trailing three-year period, but its performance this year has disappointed.

The note delivers a relatively stable monthly payment that works out to 16.66% annualized.

The very high yield offsets a good portion of the negative price performance and overall this could be a good holding for someone that needs high monthly income.

One asset class that is very well known for delivering high yields is closed-end funds. This is due largely to legal requirements that funds pay out all of their investment income to shareholders along with the fact that many of these funds use strategies that are specifically designed to generate income. In addition, the fact that these funds do not typically trade in line with their NAV performance created an added incentive to distribute profits rather than reinvest them. There is, however, a way for fans of this asset class to generate an even higher amount of income than they can get by investing in closed-end funds alone. That way is by investing in the UBS ETRACS Monthly Pay 2xLeveraged Closed-End Fund ETN (CEFL).

About The ETN

The UBS ETRACS Monthly Pay 2xLeveraged Closed-End Fund ETN is an exchange-traded note designed to track double the performance of the ISE High Income Index. The first thing to note here is that CEFL is a note, which means that it is not backed by any actual assets like an exchange-traded fund is. Rather, this is simply a debt instrument issued by UBS (UBS) in which the bank has promised to pay the holder double the performance of the underlying index. One advantage that this has over an exchange-traded fund is that it generally will have a lesser tracking error, meaning its performance will more closely follow the performance of the index, which is partly due to the fact that there are no interest costs for the leverage than an ETF would need to implement the same strategy. However, as a debt security, it does have default risk, although it seems very unlikely that UBS, which is one of the largest banks in the world, will default on its outstanding debts so the risk here seems minimal. The second disadvantage to the ETN structure is that the monthly payments that are received from this note are taxed as ordinary income instead of as capital gains. For this reason, it is best to hold CEFL in a tax-advantaged account.

As just mentioned, the note is designed to deliver double the performance of the ISE High Income Index, which measures the performance of thirty U.S. closed-end funds. All U.S.-domiciled funds that trade on a U.S. exchange and meet minimum size and liquidity requirements are eligible for inclusion. Once this list is compiled, the funds are ranked based on yield, price discount to NAV, and liquidity. The top thirty ranked funds based on this system make up the index that the note tracks. It is important to note that this is not a total return index. Rather, it makes the assumption that all distributions from the funds are taken in cash and not reinvested. As such, CEFL actually makes monthly payments to its holders to reflect this.

Here are the current funds that comprise the index and their respective weights:

Source: UBS

As many people that have read my previous fund analyses are likely well aware, I dislike seeing a fund have more than a 5% weighting to any single asset. This is because a weighting of this size can expose the portfolio as a whole to idiosyncratic risk arising from that single position. Basically, if that one asset encounters some problem that negatively affects its performance, the portfolio as a whole will suffer significant damage as a result. Therefore, it is nice to see that not single position here accounts for greater than 5% of the portfolio, although several positions are fairly close. Fortunately, the large number of funds that have a 4-5% weighting in the portfolio may help to offset the risk that this would otherwise create.


Unfortunately, as the ISE High Income Index has only been around since April 11, 2013, it does not have an extensive performance history. However, it has returned 4.56% over the past three years. While that may not seem like a lot, remember that closed-end funds tend to pay out most or all of their gains to investors and this index only tracks price performance and not total returns so it is not really that bad. However, the index's performance over the past year has certainly been disappointing, as we can see here:

Source: UBS

As CEFL is designed to deliver double the performance of the index, we might expect it to have also delivered a disappointing performance over the past year. This was indeed the case:

Source: Seeking Alpha

It is possible that this disappointing performance was at least partly due to the Federal Reserve's interest rate hikes over the past year. This is supported by the timing of the ETN's biggest dips, which very much resemble the timing of declines on bond funds like the Vanguard Total Bond Market ETF (BND). As closed-end funds are frequently used by income-seeking investors as well as the fact that quite a few funds in the index are bond and fixed-income funds, this explanation makes some sense.

If we accept that this explanation is correct, then it seems that we will see further price declines going forward as the Federal Reserve is expected to continue its interest rate tightening program until into 2020. Admittedly though, predicting the actions of the Federal Reserve is something of a fool's errand so this prediction is by no means certain.


As already stated, one of the appealing things about closed-end funds is the very high distribution yields that they possess. As CEFL delivers double the performance of the underlying index, we might expect it to boast an exceptionally high distribution yield. This is indeed the case. As we can see here, the note has paid out a total of $2.2701 per note thus far this year:

Source: UBS

This gives the note an annualized yield of 16.66% at the current price, which is certainly respectable. One other thing to note here is that many closed-end funds maintain a steady monthly distribution, so unlike UBS's other high-yielding monthly paying ETNs, CEFL maintains a relatively steady monthly payout. This could make CEFL a good asset for those investors that need steady monthly income, such as retirees.


In conclusion, CEFL is a very high-yielding member of the UBS ETRACS family of exchange-traded notes that provides a relatively steady income for its owner, unlike many other members of the ETN family. Unfortunately, its performance over the past year has been very disappointing. The annualized yield on the note is high enough to offset much of this underperformance however, so the note may still be worth considering for an investor looking to generate a high level of monthly income.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.