Equity CEFs: EXG Has Turned It Around This Year

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About: Eaton Vance Tax-Managed Global Diversified Equity Income Fund (EXG), Includes: ETB, ETV, EV
by: Douglas Albo
Summary

EXG is, by far, the most attractive Eaton Vance CEF in a bullish market environment like this.

With a top heavy exposure to FAANG stocks while not writing ANY NASDAQ-100 options against its global value portfolio, EXG is able to reap 100% of its technology positions upside.

This is resulting in a major turnaround for EXG's NAV this year, up 17.2%, far better than other Eaton Vance option funds that trade at premium valuations.

I believe Morgan Stanley, which is a huge holder of EXG and negative on the global markets, is who continues to offer shares up.

However, I believe this is a good opportunity to step into EXG while the markets keep rallying and EXG's market price keeps churning until Morgan Stanley is finished.

I want to show you the YTD statistics of the Eaton Vance Tax-Managed Global fund (EXG), $8.25 real time market price, $8.75 NAV, -6.0% discount, 9.0% current market yield and two other Eaton Vance option CEFs that trade at premium valuations, the Eaton Vance Tax-Managed Buy/Write Opportunities fund (ETV), $15.33 real time market price and the Eaton Vance Tax-Managed Buy/Write Income fund (ETB), $15.71 real time market price.

As you can see, EXG's NAV is far outperforming ETV's and ETB's NAV YTD and yet is trailing at market price resulting in a growing discounted value while ETV and ETB continue to trade at relatively high premium valuations.

What's more, EXG has the highest market yield of the three while it has the lowest NAV yield. What this means is that a current investor gets a market yield well above what the fund has to cover. Major advantage to EXG.

Now EXG is a global option income CEF that sells (writes) a relatively low 48% index options against its all large cap global stock portfolio (2/3 US, 1/3 Europe/Asia). ETV and ETB, on the other hand, are both domestic option income CEFs that sell (write) a much higher 96% percent of index options against their all large cap US stock portfolios.

This makes ETV and ETB much more defensive than EXG which is probably why Morgan Stanley, which holds large shares of ETV and ETB too, is more inclined to reduce their massive 21.6 million share position in EXG if they're looking to reduce risk. I obviously don't know if Morgan is responsible for the large overhang in EXG's shares currently, but if the market continues to perform like this, I'm guessing they will be exhausted before long, particularly while EXG's income strategy is firing on all cylinders.

That low option write percentage is certainly helping EXG this year, but what's also helping is that EXG's top 10 holdings include Google (GOOG), Amazon (AMZN), Microsoft (MSFT), Apple (AAPL) and Facebook (FB).

Now virtually all of the Eaton Vance option income CEFs include FAANG stocks, but the difference is that EXG, because its a mostly global value stock fund, writes its options on the S&P 500, FTSE 100, Dow Jones Euro Stoxx 50 and the Nikkei 225 and NOT the NASDAQ-100 index.

What this means is that EXG is able to keep virtually 100% of the upside of its FAANG stock exposure, minus Netflix which is the "N" in FAANG but plus Microsoft.

Here are the YTD performances of EXG's technology holdings in its top 10:

Chart Data by

This top heavy tech exposure while writing options only on the S&P 500 and international indices is the primary reason for EXG's turnaround this year. In other words, what hurt EXG last year with its global stock portfolio and low option writing, is now helping it recover along with its top tech holdings.

What also is helping EXG recover this year is that Eaton Vance (EV) cut EXG's distribution in January when the fund ended 2018 with a very high 11.7% NAV yield. But with the cut, EXG's NAV yield is down to a much more attainable 8.5%, the lowest of the three funds shown above.

With a major turnaround this year with EXG's NAV performance and a still generous 9% windfall market yield, EXG has the most to benefit of all the Eaton Vance option CEFs in a global market rebound.

Disclosure: I am/we are long EXG. 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.