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ETJ: 8.4% Distribution And Downside Protection

Left Banker profile picture
Left Banker


  • ETJ is an option-based CEF that is uniquely positioned to provide protection against market downturns.
  • The mechanism is an option collar strategy.
  • ETJ's implementation of the collar strategy is more management intensive and more responsive to market changes than that of NUSI, an ETF that employs a coarser version of the collar.
  • ETJ's successes during drawdowns are much more evident at NAV than at market pricing. This is due to shareholder tendencies toward panic selling in a market downturn despite owning the only fund that is designed to function best in precisely those conditions.
Life ring tossing in waves
Photo by John M Lund Photography Inc/DigitalVision via Getty Images

I recently discussed Nationwide Risk-Managed Income ETF (NUSI), an ETF that employs an option collar strategy to manage and moderate downside equity risk. NUSI is a young fund having only been in existence for 14 months. There is a much more

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 (79)

Thanks for the analysis.
So, it took them 10 years of NAV destruction to figure out they needed the cut the dividend and now some of us think this is a long term hold? Do we have any other fundamental data to evaluate this being a potential long term upswing other than squinting our eyes at the chart and cheering on the recent higher high? I'm glad the author advises buying during a big dip and not now; that is definitely sound advice. All that said, great article. ETJ is definitely worth knowing about.
7865671 profile picture
@ikoskela06 It's a defensive play that gives income. Had they right-sized the distribution long ago it would have held NAV much better. I personally think it would be more attractive with maybe about a 6% yield max so there is more flexibility to preserve NAV over time. That said, an article on SA by Douglas Albo a couple of years ago states it as best as I've ever read:

"I've never really liked ETJ and have generally written negatively on the fund over the years. The reason is that it's very difficult for ETJ to maintain, let alone grow its NAV with its income strategy no matter what the market environment we are in. That's because it's probably the most defensive equity CEF you can buy, selling roughly at-the-money S&P 500 index options against 96% of the value of its mostly large cap US stock portfolio as well as buying out-of-the money S&P 500 index put options against 96% of the notional value of the portfolio as well.

This makes for a very defensive fund that only pays off in sharp sell-offs like we saw last week. Unfortunately, those kind of sell-offs have not occurred very often and thus, ETJ's NAV has eroded over the years due to the still very generous distributions and index put options that never pay off and expire worthless."

So it may be expected that ETJ is currently lofty given stretched prices. And the old adage of Sell in May and go away. Perhaps people don't want to be un-invested and are looking for some downside protection.
adam22164 "It is also entirely tax-deferred until you meet your cost basis and then becomes a cap gain once that threshold is reached." Is this true in an IRA or ROTH?
@JRock60 In IRAs, Roths, and other retirement-type accounts the distributions and sales are not taxable events. The only taxable event is a withdrawal and all withdrawals are taxed as ordinary income.
LB, I greatly appreciate the education. Much to ponder!
Good article....thanks for your efforts.

ETJ is presently the largest holding in my portfolio (approx. 8% of total). I have held it for a couple of years, adding or trimming as appropriate. My total annual return on this investment has been acceptable (approx 15% in an IRA account). I am not too concerned about the current premium over NAV because of the quality of the underlying shares in the fund (e.g. AAPL, GOOG, MSFT, JPM, etc.), but I have trimmed my position recently and rotated into BME.
JudasPriest profile picture
@nckadams Yeah, same with me. In my case it represents 15% of my total IRA and has for the past several years. I have no complaints. I get the nice dividend, plus I'm up 20% or so on the NAV. We'll see how it handles recessions but history is a good indicator.
Great article, thank you! I wonder how the collar strategy would work in a protracted (years - not months! - long) bear market? Wouldn't they be consistently losing their (shrinking) calls premiums to buy more and more protection (puts)?.. If so, they may really start losing money...
LB, An added plus to your articles is the quality of the comments you generate and your participation in the steeam. I just want to say thank you for writing again.
sjfaris profile picture
What you are advocating is to understand market dynamics before investing in any fund. However the methodology and tools are unknown to most investors.
Your article proves that investors will need a set of tools to make judgements for each type of investment.(loans, options, real estate ect). Maybe that is a company that gives investors the power.
J Whittington profile picture
Long ETJ since 2018. Cost basis $9.00. Great fund with monthly distributions. ROC is a plus. Douglas Albo has a white paper on non destructive ROC as another source on how this works.
Maybe People rotate from ETJ into something which got harder hit during a downturn?
@Fredrik Sundelin , NUSI would be better for that strategy.
Am excellent fund indeed but alas the premium to NAV reflects it.
SleepyInSeattle profile picture
Long ETJ and NUSI. Excellent article.
2specs profile picture
Another analysis that shakes up my understanding of CEFs/ETFs--thank goodness you are willing to keep writing. Best wishes
Market Trends Investor profile picture
ETJ went down -30% in the March 2020 meltdown. NUSI went down a whopping 6%. That's the problem with CEFs. No matter what asset class they hold, they are highly highly correlated to the equity stock market. CEFs are typically held by lots of retirees and other individual investors mostly for retirement income- they get spooked- shares go down in price no matter what asset class or strategy. CEFs IMHO can be terrific investments when bought during down markets only.
rabrow profile picture
@Market Trends Investor
That is sort of true of most investments, buy when down…….
@Market Trends Investor , that's not a problem with CEFs, that's their advantage. That's your alpha. Especially so with ETJ. Take a 6% loss on NUSI and buy ETJ at a 30% drop. Sign me up. Pity I wasn't this "smart" last year. Hindsight is 20/20 for me too. Intend to do better next time. Learning never ends.
Hoisan profile picture
@Market Trends Investor how much did he NAV go down?
Good1 profile picture
With the government gas bubbling ($) the market good yield is getting harder to find. What's the bottom line here? I don't really mind getting stabbed a little with the premium if it's a reliable distribution payer. I don't buy / sell / trade CEFs.
i bought for defensive qualities an equity fund that acts like a bond fund getting a 9.5% yield at cost, so far it's been steady. thought I was the only person who liked it
Left Banker profile picture
Enough other people like it enough to have driven it to nearly a 5% premium.
Always appreciate your posts. Hope you are well and continue researching and writing. What do you think of Calamos CPZ a new fund using shorts? How about an article?
Left Banker profile picture
I'll take a look. Sounds interesting.
Mastertrust profile picture
I own ETJ, But am unsure of the right market value percentage to own. Are there general rules for this kind of protection?
Left Banker profile picture
That is a very good question. One that I have no answer to. I've thought about it though. Too much and you're paying a big price, although the 8.4% yield polishes those edges a bit. Too little and why bother? Not sure where the sweet spot is and how it may change with market changes.

I'm inclined to not hold the fund, just keep it in my awareness field if markets start moving hard down.
In IRA ETJ return is almost totally ROC. So you lend them money for pennies on the dollar return. Count me out.
Left Banker profile picture
See this: seekingalpha.com/... for a better understanding of how RoC works in a option fund.
TL:DR It's not a bad thing.
adam22164 profile picture
@JRock60 You obviously have no idea what you are talking about. ROC from option selling is entirely Non-Destructive to NAV. It is an accounting method for option income. It is also entirely tax-deferred until you meet your cost basis and then becomes a cap gain once that threshold is reached. Please don't show your utter ignorance on an investing website until you learn about Destructive v. Non Destructive forms of ROC.
Jcb331 profile picture
@JRock60 another ROC misunderstanding comment. I continuously wonder where this comes from? there must be some Financial advisors universe out there spreading false information to susceptible newbies.
Space Muppet profile picture
i think NUSI is much better for income investors who look for defensive investment, her is why:
i know ETJ for years, had it for a while long time ago and as you mentioned it never gave any protection when market is down from share price point of view, you are spot on saying that probably people don't know what they buy and panic sell it like any thing else, this was always an issue with this CEF.
NUSI in it's short life proved during the covid melt down that it is doing it's job!
bought NUSI yesterday after reading your analysis, thank you.
regardless, wouldn't touch ETJ now with current premium.
Left Banker profile picture
@Space Muppet
Yes. In an ideal world there'd by an ETJ ETF: or NUSI on steroids.
Jerbear profile picture
@Left Banker Perhaps you could design this ETJ ETF and patent the process. You have already done the marketing and customers are anxious to buy.
Left Banker profile picture
@Jerbear The trick to this is that table of thrice weekly options. Takes serious chops to make those choices and do it well.
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