Seeking Alpha

Exploring CEF Alternatives To Owning SPY

by: Retired Investor
Retired Investor
Retirement, long only, long-term horizon, Income Generation

In a prior article, I reviewed five ETF alternatives to owning SPY. None stood out as being absolutely better. This time, I used CEFs.

As with last time, when evaluating for “better,” there are different ways of measuring that - Total Return and Risk are two of them.

When selecting my test universe, I tried to pick the best performer within each factor chosen.


In a prior article, I tested five ETFs, each using a different factor, against SPY to see if investors could gain alpha using an ETF other than SPY for large-cap stocks. Given that CEFs have characteristics that differ them from ETFs, I thought each group should be analyzed separately against SPY. Unlike the ETF alternatives, only one CEF holds most of the index stocks. That said, all use the S&P 500 TR index as their benchmark. Let's see what I discovered this time.

CEFs I used in my analysis

SPDR S&P 500 Trust ETF (SPY): SPY seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the S&P 500 Index. SPY owns all/most of the common stocks that are included in the index, with the ETF percent closely matching the weight in the index.

Guggenheim Enhanced Equity Income Fund (GPM): GPM seeks a high level of current income and gains with a secondary objective of long-term capital appreciation. GPM utilizes a covered call strategy developed by GPAM to seek added income, keeping in mind the tax effects on the ETF. The fund will write call options on indices and/or securities which will typically be at or out of the money. GPM's strategy typically targets one-month options, although options of any strike price or maturity may be utilized.

Nuveen S&P 500 Dynamic Overwrite Fund (SPXX): SPXX will invest in a equities that seeks to mimic price movements of the S&P 500 Stock Index and is designed to support the fund's index option strategy. SPXX will use both call options sold and put options purchased to enhance income for investors.

General American Investors Company Inc. (GAM): GAM has a primary goal of achieve long-term capital appreciation, with lower concern on generating income. GAM invests principally in common stocks believed by its management to have better-than-average growth potential.

Central Securities Corp. (CET): CET's primary investment objective is growth of capital. While focused primarily in common stocks, it may invest in bonds, preferred stocks, or REITs. Its strategy is to invest in a small subset of the S&P 500 index.

Gabelli Dividend & Income Trust (GDV): GDV's investment objective is total return on its assets with an emphasis on dividends and income. GDV will invest at least 80% of the value of its total assets in dividend-paying or income-producing equity or debt securities, with at least 50% of the fund's assets consisting of dividend-paying equity securities.

Reason I chose each CEF

SPY: I believe most investors, if they benchmark S&P 500 returns, would use SPY. Other contributors have in their comparison articles.

GPM: Since some investors focus on income, I picked GPM, as the buy-write strategy is a popular means of enhancing income. This CEF also was one of the few that owns most of the S&P 500 stocks.

SPXX: SPXX also uses options to enhance its income return. The difference between SPXX and GPM is leverage. SPXX does not use it, but GPM does allowing for an extra factor to be tested.

CET: This CEF doesn't use extra factors to beat the S&P 500 index, just stock selection - and it currently owns less than 40 stocks.

GAM: Basically mirrors CET, but with leverage used. This will add a leverage test against CET.

GDV: GDV adds a value- and dividend-focused slant. Unlike some of the others, it holds most of the S&P 500.

Finding CEFs that closely matched the S&P 500 was more difficult than with ETFs. While all use the S&P 500 TR index as their benchmark, several own a fraction of those stocks in their actual investment strategy. That should be kept in mind when reviewing the comparison results.

Comparing the choices

Source:, and (only available from 2005), compiled by author
*Yield based on price


Some observations

  • Only two (GPM and GDV) hold most of the stocks that are in the S&P 500 index, meaning the other three are not really good substitutes despite the index they measure themselves against.

  • Only GDV has outperformed SPY since 2005 (ignoring the 5 bps CET did), but has trailed over the last 3- and 5-year periods.

  • Only SPXX and CET provided positive Alpha since 2005.

  • While three (SPXX, GPM, CET) provided a lower Beta, their Sharpe ratios were all lower too, which is not good.

  • Over the last 3- and 5-year periods, only CET outperformed SPY, but it also has the highest concentration in its Top 10 holdings. It must be doing something right, as its max drawdown is second best.

  • GPM provided the highest yield by far, but almost all of it has been ROC and LTG. Since the other option-writing CEFs show similar distribution patterns, I suspect it is how they classify the income earned by writing options. GPM's market price is down over 50% in the past five years.

  • The three funds using leverage performed the worst since 2014, which shouldn't happen in a bull market.

  • Extra fees mean these CEFs start each year 50 to 250 bps behind SPY, which only charges 9.5 bps.

  • CET and GAM, the two CEFs with largest discounts to price, show little movement over the last five years in that discount ever closing. GDV's discount is close to its low of around 4%, so I would not expect much more improvement there either.

  • Both CEFs that use leverage underperformed the CEF following the same strategy but without leverage. This confirms my prior article that questioned the value of CEFs using leverage.

Looking at each CEF

Author's Note: The following data and charts are all from Data starts at inception of either the CEF or SPY, whichever is the newer.

SPXX comments

The low beta (.77) did not help last fall when SPXX, despite the higher income, underperformed SPY. It outperformed during the 2008-9 correction though. If you are looking for higher income, this CEF is a possibility, but wait for the premium to shrink or reverse.

GPM comments

Here, a picture is worth a thousand words, or more precisely, almost 400 bps of lost performance annually. It would appear the fund's ROC-comprised dividends really are giving you your investment back quarterly.

CET comments

CET has proven it can outperform SPY, but its small number of holdings means it isn't really a clone of SPY. If you like what the fund owns, this could be a consideration for some LC diversification.

GAM comments

Based on the yield, the fund did meet its goal of not emphasizing income. Unfortunately, that has also meant poor performance recently. With the worst Alpha of the five CEFs, investors must have a better choice.

GDV comments

Like GAM, GDV was matching SPY until around 2015, but has underperformed by almost 400 bps annually since. If you are looking for a CEF selling at a discount, not sure this is your best choice.


The main reason I did this follow-up article was to see if adding leverage, buying at a discount, or overwriting with options would be better than SPY or the ETF alternatives covered in my prior article. Unlike the ETFs analized, most of the CEFs are “S&P 500 index in name only” replacements for SPY. Only GDV shows a history of seeing its discount shrink, but it currently is near the minimum discount of recent years. If you're looking for enhanced income, some provide that. If you're looking for a CEF/ETF doing option writing, that would be another article, as there are plenty of choices.

As with any article I write, no investment advice is being given, just ideas for readers to explore. You should be able to find other articles that go into more detail on most of the ETFs mentioned in this article. If you want to know when I get published next, click "Follow" next to my pen name.


I included links to the home page of each ETF/CEF used above and one to my blog article on CEF usage of leverage, since that idea was discussed in this article.







CEFs & leverage

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.