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ETY: Some Thoughts On CEF Risk And Return Of Capital

Left Banker profile picture
Left Banker


  • The sustainable income portfolio seeks high income and capital preservation in a mix suitable for a new retiree.
  • ETY is discussed as an example of a top-performing option-income equity closed-end fund.
  • ETY is a solid choice for income with capital stability.
  • I include some thoughts on risk factors unique to the closed-end fund space. One real but too often overlooked (CEF risk) and another that gets lots of attention but is poorly understood (Return of Capital).

Close-up Of Wooden Blocks With Risk Word
Photo by AndreyPopov/iStock via Getty Images

This continues my series on creating a new portfolio of income investments designed to have a high payout with capital stability. I'll not repeat the details, but it is important to see this discussion in that

This article was written by

Left Banker profile picture
I'm a retired individual investor.

Analyst’s 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.

This article does not constitute investment or tax-planning advice. I am passing along the results of my research on the subject. Any investor who finds these results intriguing will certainly want to do all due diligence to determine if any fund mentioned here is suitable for his or her portfolio. And, any investor who has concerns about the tax status of an investment will want to consult with a tax professional on that topic.

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 (70)

ETY is only a good buy during huge market downturns, you will be sorry if you bought right before one, with this CEF
ALLDAY1 profile picture
ETV popup

03:03 PM ET
Action for symbol ETV popup
+$12,441.50 +40.92%

ETY popup

+$7,235.31 +40.84%
03:07 PM ET

One them both 10 + years
Hipsterkitty profile picture
Thank you @Left Banker for an excellent article. I have been conflicted about buying ETY vs. ETV. Their returns, holdings, performance are all similar. Is there a reason you prefer ETY?
Tampa-T profile picture
I see mention of various EV funds in the comments, but no mention of ETG.
Its done well for me and appears to have better performance than the others mentioned.
Would appreciate your opinion of ETG relative to the others if you have a chance.
I really liked the tip on InvestSpy. Nice little addition to one's bag of tricks. Thanks for the insight.
Left Banker, any other suggestions for a fund that actually uses options well to manage volatility v. just increasing routine distributions? I hold a lot of ETJ for the past 2 years and am happy with it, but perhaps I was fortunate to buy when I did. Thanks again! Shooter
Left Banker profile picture
Maybe NUSI? A long/short fund that uses derivatives to generate current income with downside protection. I don't know much about it. Some people have recommended it but my quick look (emphasis on quick) didn't lead to any kind of follow up.
Left Banker- very nice article. I am keeping my EXG to have a little more global tilt but you article persuaded me to compare to my holding of BDJ and I think DIVO is a better fit with excellent total returns even if the income is a little less. The team at CWP seems to have a smarter group of option writers. Thanks! Shooter
Left Banker profile picture
Good luck with it. It's one of my current favorites. I like DGRO in the category but its a dividend growth fund with quite modest income.
Long ETY since it was paying quarterly distributions in 2012. Multiple trades around the base position- buying when distribution yield was 9.75-10% and selling when at price was at premium to NAV.
RZel profile picture
Good analysis. I use CEFs a lot, including EXG. Eaton Vince has plenty of good ones.
What do you think about QYLD?
Since I am not very familiar with options, I use the fund managers' expertise.
Left Banker profile picture
I been asked about QYLD a lot. I'm not a fan. Just off the top of my head, and memory, its high yield comes at a cost to capital. Not something I'm interested in. QQQX is a better call in my view.
Think. Focus. Health. Wealth profile picture
@Left Banker numbers dont lie...QQQX wins
QQQX QYLD Growth of $10,000.00
With Dividends Reinvested
Click for detailed chart tool
Start date: 12/12/2013 12/12/2013
End date: 04/06/2021 04/06/2021
Start price/share: $17.20 $25.04
End price/share: $27.78 $22.78
Starting shares: 581.40 399.36
Ending shares: 966.65 785.41
Dividends reinvested/share: $10.85 $15.73
Total return: 168.54% 78.92%
Average Annual Total Return: 14.45% 8.27%
Starting investment: $10,000.00 $10,000.00
Ending investment: $26,849.68 $17,886.44
Years: 7.32 7.32
Left Banker profile picture
@learning to be patient with mr mkt
That's huge. I knew QYLD was problematic but that's really extreme.
Good Article
Am bookmarking
Thank You
For those interested in the tax consequences of ETY and EXG distributions, recent years show that EXG tends to have a higher percentage of its total distribution that is non-dividend (RoC) than ETY.
7865671 profile picture
@sstagebe I hold ETY in a taxable account so I knew its final ROC percentages for the last several years ran between 36%-63% ROC until 2020, when it was >90% ROC. I hold EXG in an IRA so I never gave the ROC percentage much of a thought, though I felt pretty strongly that they were still over distributing in 2017 even after the first cut. I just looked up the details on EV's site and you are right in that EXG has paid >90% ROC every year since 2017. I had thought the 2018 cut addressed the over distribution issue, but now I wonder if there is more destructive ROC than I originally expected.
Left Banker profile picture
EV used to make it easy to see the previous years actual RoC. They started making it difficult a few years ago. About the same time RoC was routinely less than they were reporting on the monthly notices.

Another pet peeve of mine is that RoC is often overreported on the monthly notices. Which is fine, I suppose. But it's never corrected for the record. Sites like cefconnect, morningstar, et al. continue to retain those monthly figures forever even when they bear no resemblance to the actual reported RoC at the end of the year.
Left Banker profile picture
It is not necessarily over distribution.
7865671 profile picture
Great write up and a fresh take on benchmarking option CEFs! The Daily VaR metric is a new take on this to me.

I've wondered if there is a better way than the simple beta and max drawdown to communicate a CEF's relative performance and risk/variance relative to the broader market. For example, is there a "beta" that is split into two metrics: one that assesses a stock's "beta" on SPY's down days and one on its up days? One could make a reasonable estimate of the expected impact to the NAV on an up or down day, but it's a CEF's market price extra variability (discount/premium changes, for example) that I think may be revealed with a two sided "beta".

Just wondering....
Left Banker profile picture
Morningstar publishes an upside and downside capture ratios. For the last year ETY has greater upside capture (80%) than downside capture (72%) but that's not the case for 3. 5 or 10 years.
7865671 profile picture
@Left Banker Thank you! I learn so much from your articles. Just to echo what others have been saying, I'm so glad you decided to "help a friend" and publish again on SA.
JJJRS profile picture
07 Apr. 2021
Very informative article - thanks! I consider ETY, EXG and ETJ to be buy, drip, and hold. The tax advantaged strategy is a nice feature.
DontTaxMeBro profile picture
Thank you! I'm long ETY, EXG, BDJ, BOE, and DIVO as my designated option writing portion of my portolio (currently 25%).

I agree with your comments on DIVO...the ETF wrapper is a huge bonus IMO compared to CEFs as I'm always weary of the latter's warts during bear markets. I just wish DIVO had more AUM. Unfortunately, there are just too many ETFs competing for equity income dollars.
Jcb331 profile picture
thanks for another informative article. ETJ another tax advantaged CEF has a slightly different approach to options as it Sells PUTs on individual stocks. along with buying and selling calls on index stock portfolio. I'm long ETY,ETJ and EOS.
Left Banker profile picture
I'm not a fan of ETJ. I know lots of people have made money on the fund and it has its following but it only outperforms for brief periods in declining markets. Even that is problematic because to get the full benefit means you have anticipate the declining market ahead of time. It's the poster child for declining NAV otherwise (-27% in 10 years).

OTOH hand last time I looked at it, it had a high distribution rate.
@Left Banker @Jcb331

That was always my belief (always meant to look it up too, someday...): that the “defensiveness” of ETJ was actually hogwash (excuse my language). Yes, NAV performance might be such that it loses less in downturns, due to a higher portion of downside-protecting options used, but people will still sell off ETJ with the rest of its CEF ilk in market swoons. Thus it’s not like it “holds up better” (ie, losing less). And in the rebound, it would recover less. Kind of similar to the spate of low-volatility products that has done poorly since March 2020.
How is ROC treated in a IRA, ROTH and non-IRA and non-ROTH account?
@JRock60 ROC in an IRA/Roth is a nonissue, just as dividends, cap gains. LB has explained treatment in a regular account in the ROC section above.
Left Banker profile picture
Yes. None of it matters in a tax-advantaged account. All gains are treated the same: No taxes until you take money out (traditional IRAs of various flavors) or no taxes ever (Roth). It's in taxable accounts that it matters.
ALLDAY1 profile picture
If you invested on 4/24/2017 you would have today this much
based upon 4/6/2021 close
Starting price 9.48 value 17,715.84
Yesterday's price 12.97 Value 24,240.93
Total increase 6,525.09
Gain/Loss (%) ascending + 36.83

Directly off my brokerage statement

Buy, leave alone SWAN.

Left Banker profile picture
Yep, but to be fair a blind pig would have made money in domestic equity since 2017.
ALLDAY1 profile picture
@Left Banker To be fair not everyone made money since 2017, and they came in with eyes wide open....maybe had the wrong shade of lipstick. But I never criticize a winner and losers are sold. Simple solution.

Left Banker profile picture
@ALLDAY1 No, I'm sure you're right. My point it that is was one of the all-time great bull runs from 2017 to the Covid crash. Seems to have picked up where it left off. But I'm inclined (over-inclined some would say) to bullishness. Before the emu (or ostrich, I don't really know the difference) I had a leather-clad bull for my profile pic.
Excellent article. And thank you for the deeper explanation of return-of-capital. That helped me a lot!
Left Banker profile picture
@Favorite Averitt

thank you for letting me know. There's so much misinformation about RoC. Old hands in the CEF space understand and will often make the point in comments, but many newer investors in CEFs are dissuaded by the name (it's an accounting term and not what it sounds like in reality) and the constant stream from so-called experts, like the article I cited, telling us it is a bad thing.

Remember, anyone who can put sentences together into paragraphs can publish on Seeking Alpha. The fact that they do does not make them experts or even mean that they know what they're talking about (myself included). There is no vetting for expertise or knowledge. The editorial process is a joke on content; it's glorified copy editing. Be careful about what you read here. There are great authors and contributors, but there are too many that are giving dangerous advice while churning out verbiage for beer money.
MAYHAWK profile picture
@Favorite Averitt,

I second that. Perhaps the multitudes on here who constantly harp on RoC without understanding the concept will stop. They are as ill-informed as those who constantly drone on about "exorbitant fees" in CEF's.
scarp1952 profile picture
I bought both these funds back in 2010. Performed well for my income portfolio. Also added to ETY during the Pandemic shutdown. A good choice for income that is articulated well here by LB. THANKS
Left Banker profile picture
2010 is about the time I started with these funds. EV's option-income funds were among the first CEFs I owned.
Jerbear profile picture
@scarp1952 @Left Banker
That makes three of us.
ETY is my largest CEF holding. Douglas Albo was publishing articles about the EV option income funds at that time.

Many of us retirees have become very knowledgeable about CEFs thanks to Douglas Albo and Left Banker
2live4divs profile picture
@Left Banker I as well. 2009 -2010 ,exg ety etj. last year added exd. Eaton zvance has done super well for me.
LongHoller profile picture
Excellent analysis. I've held ETY for 6 years and during that time it has delivered an annualized return of 15.55%. Exceptional for a high monthly dividend player.
Left Banker profile picture
I agree, it is an exceptional fund.
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