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Closed-End Funds On Sale Bring Dividend Yield On 2x Leveraged High Yield ETN To 20.1%

Lance Brofman profile picture
Lance Brofman


  • The current discount to book value for CEFL is near the highest ever, which makes this a possible buying opportunity.
  • Return of capital is a consideration in high yield closed-end funds and is a factor in all of the 2x Leveraged High Yield ETNs.
  • The major determinant for the outlook for 2x Leveraged ETNs will be the Federal Reserve's actions.

Outlook For CEFL, Reasons to Buy and Reasons for Caution

The recent market declines have made all of the 2x Leveraged High Yield ETNs more attractive for those seeking to maximize current yield, as their yields are now higher due to their lower prices. Most investors would not consider UBS ETRACS Monthly Pay 2x Leveraged Closed-End Fund ETN (NYSEARCA:CEFL) a particularly good instrument to hedge against or take advantage of a sharply rising equities market. However, for a portfolio that is constrained to only buy securities with current yields above 15%, CEFL is one of the only games in town. The recent price decline has brought the CEFL dividend yield on an annualized monthly compounded basis to 20.1%. Another reason to consider CEFL is that the average discount to book value for the components of the ISE High Income™ Index (YLDA) upon which CEFL is based was 12.25% using data available as of November 30, 2018. I compute the average discount to book value of the CEFL components periodically. One problem is that the annual rebalancing of the index, where the components can be changed significantly, makes comparison with earlier values for the discounts to book value less useful. However, even with that caveat, a major driver of the price movements for CEFL and the closed-end funds in the index has been the discounts to book value.

The highest average discount to book value I computed for the high dividend closed-end funds that comprise the index upon which CEFL and its unleveraged version, the YieldShares High Income ETF (YYY), was 13.8% on September 18, 2015. The lowest was 6.9% on July 28, 2016. Over that 0.86 year period, buying on September 18, 2015 and selling on July 28, 2016, the annualized gain including reinvesting dividends for CEFL was 31.74%. The best time to buy high dividend closed-end funds usually has

This article was written by

Lance Brofman profile picture
Note: In 1996 Fundamental Portfolio Advisors and myself were subject to civil litigation by the SEC which resulted in deregistration and a permanent bar from the securities industry. - Ph.D. economics and Finance MBA finance NYU) Colorado Technical University Professor – courses: Applied Managerial Finance (Graduate Level), Microeconomics, Macroeconomics., Previous: Globe Institute of Technology Professor – Economics and Finance, Head of Business Department International Finance European School Of Economics (New York) Professor – Economics (Graduate Level) Courses taught: Microeconomics Metropolitan College of New York Professor – Economics, Banking and Finance Courses taught: History of Economic Thought, Macroeconomics, Money and Financial Institutions World Gold Council Consultant Economist New York, NY • Constructed econometrics relating to gold's role as a portfolio diversifier primarily aimed at institutional investors. • Focused on the embedded optionality of gold in terms of its relation to other investment assets and economic fundamentals such as inflation and business conditions. Freenet, Inc. Founder Internet Startup company with investment advice websites. Fundamental Portfolio Advisors, Inc. Chief Portfolio Strategist – Founder • At the predecessor company I started the New York Muni Fund, the first single state triple tax-free municipal bond fund. • I took the fund from a one-employee start-up where I performed every function to a family of mutual funds which had five funds with total assets above $300 million and which did all of its distribution and transfer in-house. • I wrote the initial prospectus and was responsible for managing the portfolios of what eventually grew to be a family of 5 mutual funds. • Was chief economist for parent company’s brokerage firm. • Involved on the buy-side in the development and monitoring of various structured municipal finance products. Worked with major issuers such as New York City and major investment banks such as Merrill Lynch and Goldman Sachs. • Submitted a U.S. Patent for a portfolio management system for mutual funds involving derivatives. A. Gary Shilling & Co. Senior Economist – Economic consulting and forecasting. Both macro and micro. • Clients included: Emerson, Castle & Cooke, Cooper Industries I was the author of the 1979 study commissioned by the U.S. Government Interstate Commerce Commission, which calculated the expected economic impact of trucking deregulation. White, Weld & Co, Inc. Economic analyst • White, Weld was the sixth largest investment banking and brokerage firm when Merrill Lynch bought it. • Extensive work was done on the All-American Pipeline Proposal to tap the Alaskan Gas Reserves. • The economics department of White, Weld formed A. Gary Shilling & Co. at the time of the Merrill Lynch merger. American Stock Exchange Economic analyst Degrees: New York University June 1978 Ph.D. Economics/Finance • Ph.D. dual field, economics and finance. • Doctoral dissertation was in contingency claims (options) theory June 1973 MBA with concentration in economics and finance NYU Engineering School June 1971 Bachelor of Science - Nuclear Engineering Published works Analysis of the Embedded Inflation Optionality in Gold Prices. World Gold Council, 2000. New York, N.Y. The Economic Impact of Trucking Deregulation. Interstate Commerce Commission, 1979, Washington D.C. I was an author of the textbook: 'Global Financial Management' Words of Wisdom, Schaumburg, IL. Dec.2015 ISBN 978-1-934920-46-6,

Analyst’s Disclosure: I am/we are long CEFL, MORL, MRRL, SMHD, REML. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (47)

Mine still has not posted I hope it does tonight
Finally got the Cefl payment today
Broker did not get The dec 24 payout for Cefl From ubs. Anyone know why
No for Cefl. Called broker they did not get it yet.
ksal55 profile picture
Has anyone received this months payment yet?
Cefl payout 24 dec.
mgarri4979 profile picture
Lance- after the latest steep correction and the outlook for few if any further rate hikes, isn’t this a great time to accumulate MORL and REML?
Corp investment grade got hammered the most this year! More value destruction and dividend cuts are coming. Leverage on top of leverage in this joke of an ETN.
Lance Brofman profile picture
UBS and Credit Swiss have categorized as being "too big for their country" meaning that Switzerland could not bail them out as the USA did with its biggest banks. For the ETNs the only thing that matters is that UBS and Credit Swiss don't go bankrupt within the five day period when the ETNs can be redeemed by holders.
Lance. What is your opinion of the row between EU and Switzerland. Would it have any impact on UBS backed ETNs and Credit Swiss backed as well.
Lance Brofman profile picture
I calculated a projection for the December 2018 monthly CEFL dividend of $0.2219.

Payment Date Coupon Amount Ex-Date Record Date
12/24/2018 $ 0.2185 12/13/2018 12/14/2018
RussianBearwithBalalaika profile picture
The overinvestment problem caused by the reduction in taxes on the wealthy is exacerbated by the increased tax burden on the middle class. While overinvestment creates more factories, housing and shopping centers, higher payroll taxes reduce the purchasing power of middle-class consumers...>>

The wealthy must have realized this logic and its consequences. So instead of building new factories for already downsized middle class they they've been buying back their own shares and speculating.
Lance Brofman profile picture
...lowering corporate tax rates would not result in any significant additional hiring or growth in wages or output. The entire incidence of a corporate income tax falls on the owners of the corporation, to the extent they are pension funds or other institutions the incidence falls on them. If a corporate income tax is a percentage of pre-tax income, none of the corporate income tax can ever be passed on to employees or customers. That is because any hiring, wage or price decision that maximizes pre-tax profits would also maximize after-tax profits.

If a profit-maximizing rational corporation is charging $10 for an item, that is because it is more profitable to charge $10 than $9.99 or $10.01 taking into account market demand and competitive pressures. Thus, $10 is the price at which pre-tax profits are maximized. If a corporate income tax is levied or changed as a percent of pre-tax profits, $10 is still the price that maximizes both pre-tax and after-tax profits. Thus, the tax change can not cause any change in the price and is not passed on to consumers. The same applies to a corporation that is paying a wage that maximized its pretax profits, which is also the wage that maximizes its after-tax profits. Likewise, the level of output or number of employees that maximizes pretax profits is also the level of output or number of employees that maximize after-tax profits.

The shift of the tax burden in the United States from the rich to the middle class has been a major factor is creating the glut of savings which has supported higher prices for financial assets. This has been a world-wide phenomenon. As the tax burden is further shifted away from the rich the glut of savings will grow. Thus, savings and investment/ supply and demand of loan-able funds factors will become increasing more powerful drivers of higher prices for financial assets..."
RussianBearwithBalalaika profile picture
"The shift of the tax burden in the United States from the rich to the middle class has been a major factor is creating the glut of savings which has supported higher prices for financial assets. "

This point makes sense to me only if you assume that the glut of savings is created both by the rich and the middle class. That is the middle class increases pre-tax contributions to Traditional IRA and 401k in order to protect a part of its income from rising taxation. This decreases even further its buying power/consumption and, in turn, makes productive investment even less attractive for the rich. In other words, a consumer economy becomes increasingly less profitable for the rich and less affordable for Labor. Hence, the glut of savings from both actors is looking for profitable investment and cannot find. Not only in this country but increasingly so internationally as well, since the decaying consumer economy in the US can no longer serve as a locomotive for productive growth elsewhere. Thus, trillions keep sloshing around the financial world ocean unable to land a profitable productive employment making their owners (or owned by them? is it I who own a million, or it's a million who owns me?) jittery at best and psychotic at worst. Most of these trillions have two choices, either contribute to the financial pyramid in hope that in the end someone else will be left behind holding the proverbial bag, or to lay low with a negative interest rate paid to the central banks. Unfortunately, I don't have access to your articles at the moment, but I read this one when it was still in free access and if my memory is correct your model of rational actors cannot explain this outcome. According to it, lesser taxes on the rich was supposed to create more productive investment of capital, but something went wrong... Thank you for taking time to answer my previous comment.
ksal55 profile picture
December CEFL Payment

Payment Date Coupon Amount Ex-Date Record Date
12/24/2018 $ 0.2185 12/13/2018 12/14/2018
If you bought CELF 2 years ago at $16.32 on Dec 5 2016 you would have received 24 monthly payment which totaled $5.52 per share for you cash account When you sold CEFL at closing today Dec 4th 2018 you received $13.64 per share for a loss of $2.68 per share . You take $2.68 loss per share out of your cash account of $5.52 per share and you have earned $2.94 per share or 18% on every share of CEFL without reinvesting anything. By reinvesting your cash account the annual return due to CEFL should approach 15% or more..
Mr V.
05 Dec. 2018
M, It's more like 7 1/4% annual return. Still less than half of DVYL!

DVYL CEFL Growth of $10,000.00

With Dividends Reinvested

Start date: 12/05/2016 12/05/2016
End date: 12/04/2018 12/04/2018
Start price/share: $59.01 $16.32
End price/share: $67.51 $13.74
Starting shares: 169.46 612.75
Ending shares: 194.58 837.06
Dividends reinvested/share: $9.38 $5.29
Total return: 31.36% 15.01%
Average Annual Total Return: 14.64% 7.25%
Starting investment: $10,000.00 $10,000.00
Ending investment: $13,137.41 $11,500.36
Years: 2.00 2.00

Source: Dividend Channel
PennyPlanSupporter profile picture
If you buy something for $1,000 and it pays you 22% per year and now it is worth $100 but it has paid you back 90% of your money have you won?

What about the "time value of money" principle?
Bert Mariani profile picture
Hello DVL - DeepValueLover

How has your PG - Procter and Gamble -- doing over the years ?
The one you tooted so much over and over !!!

MORL 130% PG 30%


MORL PG Growth of $10,000.00
With Dividends Reinvested
Click for detailed chart tool
Start date: 11/18/2013 11/18/2013
End date: 12/11/2018 12/11/2018
Start price/share: $18.09 $84.57
End price/share: $14.57 $93.91
Starting shares: 552.79 118.25
Ending shares: 1,578.88 139.02
Dividends reinvested/share: $17.98 $13.42
Total return: 130.04% 30.55%
Average Annual Total Return: 17.88% 5.40%
Starting investment: $10,000.00 $10,000.00
Ending investment: $23,009.02 $13,052.84
Years: 5.07 5.07
PennyPlanSupporter profile picture
@Bert Mariani

I'm not sure what you are talking about but are you actually disparaging a strong, classic blue chip investment on an investment website?
Bert Mariani profile picture
Hell Deep Value Lover

PG - Procter & Gamble
The stock you kept repeating about as being the Greatest investment in the history of the NYSE.

If you can't remember go back in your 13,832 postings and do a search.
Mr V.
03 Dec. 2018
CEFL, is not a great performer take a look
Growth of $10,000.00
With Dividends Reinvested


Start date: 01/07/2014 01/07/2014
End date: 12/03/2018 12/03/2018
Start price/share: $40.82 $27.03
End price/share: $70.07 $13.86
Starting shares: 244.98 369.96
Ending shares: 346.62 869.71
Dividends reinvested/share: $19.27 $16.63
Total return: 142.88% 20.54%
Average Annual Total Return: 19.82% 3.88%
Starting investment: $10,000.00 $10,000.00
Ending investment: $24,284.63 $12,053.68
Years: 4.91 4.91

DVYL is MORE then twice!
Yup you throw in anything vs CEFL and its a clear looser.

Flatter yield curve, tighter credit and low oil prices . Only going down from here what CEFL is all about.
Mr V.
04 Dec. 2018
Right ,"Know what you own, and KNOW why you own it."
That advice is not for the "long term" sheep that cheer every article like this..
I currently own 50% of my portfolio in OXLC. Seems like a no brainer. Might add more at this price.
Have you done any digging into OXLC? 5 months guaranteed payments north of 18%. Any thoughts professor?
Toofuzzy profile picture
cefl and Bdcl have been horrible investments for me over the past year.

I wonder how mreits income will fare in a rising rate environment.

is the underlying income of cefl and Bdcl holding up over the past year or two.
Smylie profile picture
Are you looking at it from a drop in stock price alone? If you are then I think they are no better or worse than anything else out there. Didn't you get dividends with that stock? Didn't they allow you to either reinvest or buy other stocks or spend the cash?
Toofuzzy profile picture
my fear is that they are going down faster than the dividends I receive.
alejrossi profile picture
You have to look at these every 3, 4 or 5 years, you cant look at them short term. Think that in 5 years time you have doubled your money.
HighYieldAnalyst profile picture
Another ETN I obtained on sale about a week ago is MLPQ ... it should have a great day today ... I have double sized positions on REML (also obtained recently) and MLPQ due to their oversold pricing ... GLTA
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