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3 Overvalued Closed-End Funds To Rotate Out Of If You Own Them



  • CEFs are often inefficient, with prices diverging for no reason other than limited supply and demand.
  • We present three CEF rotation opportunities that we highlighted to our members last week.
  • One has already played out fully, but two are still in play. Don't let mean reversion catch you out!
  • Looking for more stock ideas like this one? Get them exclusively at CEF/ETF Income Laboratory. Get started today »

Author's note: This article was initially released to CEF/ETF Income Laboratory members last week (April 28, 2020). An update of the numbers and situation are presented after each trade suggestion. One suggestion has already played out fully, but two are still in play.

3 More Quick Rotation Opportunities

Rotating between overvalued closed-end funds into less overvalued ones is a cornerstone strategy at CEF/ETF Income Laboratory which we call "compounding income on steroids."

Here are three quick rotation opportunities that you may consider if you own the overvalued fund. After premium/discount reversion takes place, you can consider swapping back to the previously sold fund to gain "free shares" of the fund, no matter whether the markets has moved up, down or sideways in the meantime!

The main risk of this strategy is that the valuation difference can widen further, so sometimes patience is required! More active traders can consider shorting the overvalued fund, and possibly hedge by buying the undervalued fund.


1. FGB --> BIZD

  • Sell: First Trust Specialty Finance and Financial Opportunities Fund (FGB)
  • Buy: VanEck Vectors BDC Income ETF (BIZD)

(Source: Stanford Chemist, CEFConnect, data from 4/27)

What's FGB doing at a +27.17% premium? Beats me! As of writing, FGB is up +5.26% while the benchmark ETF (BIZD) is about flat, putting the intraday premium at approximately +33%. The one-year z-score is +4.71, indicating extreme relative overvaluation.

The premium is highest since inception of the fund in 2007.

(Source: CEFConnect, data from 4/27)

There isn't another BDC CEF available, so the swap would be for BIZD.

Importantly, FGB is expected to announce its next quarterly distribution in around two weeks (the last announcement was on February 10). Given how much the NAV of the fund has fallen over the past several months, a distribution cut is quite likely, since the

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This article was written by

Stanford Chemist profile picture
CEF/ETF income and arbitrage strategies, 8%+ portfolio yields

CEF/ETF Income Laboratory is a premium newsletter on Seeking Alpha that is focused on researching profitable income and arbitrage ideas with closed-end funds (CEFs) and exchange-traded funds (ETFs). We manage model safe and reliable 8%-yielding fund portfolios that have beaten the market in order to make income investing easy for you. Check us out to see why one subscriber calls us a "one-stop shop for CEF research.”

Click here to learn more about how we can help your income investing!

The CEF/ETF Income Laboratory is a top-ranked newsletter service that boasts a community of over 1000 serious income investors dedicated to sharing the best CEF and ETF ideas and strategies.

Our team includes:

1) Stanford Chemist: I am a scientific researcher by training who has taken up a passionate interest in investing. I provide fresh, agenda-free insight and analysis that you won't find on Wall Street! My ultimate goal is to provide analysis, research and evidence-based ways of generating profitable investing outcomes with CEFs and ETFs. My guiding philosophy is to help teach members not "what to think", but "how to think".

2) Nick Ackerman: Nick is a former Financial Advisor and has previously qualified for holding Series 7 and Series 66 licenses. These licenses also specifically qualified him for the role of Registered Investment Adviser (RIA), i.e., he was registered as a fiduciary and could manage assets for a fee and give advice. Since then he has continued with his passion for investing through writing for Seeking Alpha, providing his knowledge, opinions, and insights of the investing world. His specific focus is on closed-end funds as an attractive way to achieve income as well as general financial planning strategies towards achieving one’s long term financial goals.

3) Juan de la Hoz: Juan has previously worked as a fixed income trader, financial analyst, operations analyst, and economics professor in Canada and Colombia. He has hands-on experience analyzing, trading, and negotiating fixed-income securities, including bonds, money markets, and interbank trade financing, across markets and currencies. He is the "ETF Expert" of the CEF/ETF Income Laboratory, and enjoys researching strategies for income investors to increase their returns while lowering risk.

4) Dividend Seeker: Dividend Seeker began investing, as well as his career in Financial Services, in 2008, at the height of the market crash. This experience gave him a lot of perspective in a short period of time, and has helped shape his investment strategy today. He follows the markets passionately, investing mostly in sector ETFs, fixed-income CEFs, gold, and municipal bonds. He has worked in the Insurance industry in Funds Management, helping to direct conservative investments for claims reserves. After a few years, he moved in to the Banking industry, where he worked as a junior equity and currency analyst. Most recently, he took on an Audit role, supervising BSA/AML Compliance teams for one of the largest banks in the world. He has both a Bachelors and MBA in Finance. He is the "Macro Expert" of the CEF/ETF Income Laboratory.

Analyst’s Disclosure: I am/we are long ECC, OCCI. 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.

I am short FGB.

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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