Weekly Review: CEFs That Follow The Broad Market

Includes: GGT, SPY
by: Arbitrage Trader

Weekly review of CEFs and benchmark that follow the broad market.

Brief recap of important news related to the sector.

Comparison among the funds using several important metrics.

Over the past week, we saw another decline in the broad market. In the last days of the year, there are a lot of news and events that can further influence volatility. The Federal Reserve is expected to announce another rate hike this Wednesday. Traders will be closely monitoring for any signals about the forward guidance and future plans for hikes next year. What is more, there will be a release of important data about the final reading of 3rd quarter US GDP and housing data for November. Bank of England and Bank of Japan will also have monetary policy announcements.

The Benchmark

Over the past week, the price of the benchmark, the SPDR S&P 500 Trust ETF (NYSEARCA: SPY) decreased by 1.18%.

Source: Barchart, SPDR S&P 500 Trust ETF

The News

This week, John Hancock Financial Opportunities Fund (NYSE:BTO), John Hancock Hedged Equity & Income Fund (NYSE:HEQ), John Hancock Income Securities Trust (NYSE:JHS), John Hancock Investors Trust (NYSE:JHI), John Hancock Premium Dividend Fund (NYSE:PDT), and John Hancock Tax-Advantaged Dividend Income Fund (NYSE:HTD) announced their renewed share repurchase plans which are set to expire on December 31, 2018. Moreover, John Hancock Tax-Advantaged Global Shareholder Yield Fund (NYSE:HTY) announced a share repurchase plan. Further clarifications can be obtained at Yahoo Finance.

Source: Yahoo Finance

1. Highest Z-Score

We use the Z-score to find statistically undervalued or overpriced funds in the sector. If the value of Z-score is negative, it signals a "Buy" opportunity. Conversely, if you are looking for a "Sell" candidate, you should be interested in a positive Z-score value. We use a 1-year basis to see how many times the current discount deviates from its mean for that period.

Source: cefanalyzer.com

This week, we will use some data from a different provider because some of the funds' NAVs were not updated on Friday. The recent downturn in the market was followed by selling in our closely watched CEFs. As we can see from the table above, there are no funds that trade at unusual high Z-scores. The only CEF that we can include in our analysis is Gabelli Multimedia Trust (GGT) which currently trades at a Z-score of 1.6 and at a current premium of 7.90%. Nowadays, there are almost no CEFs that trade at such "high" premiums. You can use the position as a hedge in your long portfolio.

2. Lowest Z-Score

We can see from the table below that there are some buy opportunities based on statistics. However, each one of them should be carefully considered. Most of the funds continue to trade at low Z-scores. Furthermore, they are away from their average 52-week discounts. In this market environment, we cannot recommend any high potential fund for bottom-pick. However, if the market recovers you should be watching these funds as they can retrace faster.

Source: cefanalyzer.com

3. 5-year Annualized Return on NAV

The aim of the below ranking is to show us the funds that follow the broad market with the highest yields based on net asset value. A combination of the return with the other metrics that we have is a foundation of our research for potential "long" candidates.

Source: CEFConnect.com

4. Highest Premium

Source: cefanalyzer.com

We can see that even the high-distribution funds are starting to trade lower and there are only a few funds that continue to trade at little premiums.

5. Biggest Discount

Source: cefanalyzer.com

Most of the funds in the table above give little distributions and are close to their 52-week average discounts. We will be closely monitoring all of the funds currently trading at discounts in the upcoming weeks as the end of the year approaches.

6. Highest Distribution Rate

The table shows the funds with the highest distribution rate on price.

Source: CEFConnect.com

The funds with high distribution rates are those which currently trade at little premiums/discounts. With the fall of the broad market, they started selling as well.

7. Highest Effective Leverage

Looking into that section, we can clearly see that there are some funds that use high leverage. In the environment of rising interest rates, this should not be underestimated and should be included in your research if you decide to buy/short any of the funds.

Source: CEFConnect.com

Statistical Comparison And Potential Trades

To sum up, most of the funds are trading lower as the market continues to be very volatile. Any further decline will probably accelerate widening the discounts. We have included one potential "short" position if you want to hedge your portfolio. If the market continues to go higher/lower, we will continue to monitor the funds that trade at unusual discounts/premiums and/or Z-scores and will reveal if any good arbitrage opportunity arises.

Note: This article was originally published for our subscribers on 12/16/2018, and some figures and charts may not be entirely up to date.

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.