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Hidden Gem, 9.8% Yield, Inflation Protection: XFLT


  • XFLT is a floating-rate loan and CLO fund, and mostly an overlooked CEF.
  • CLOs today are the hottest sector to be in, with the system flooded with cash and heading towards inflation and a red-hot economy.
  • XFLT is one of the rare solid CEFs still yielding over 9%.
  • It is a strong buy at this price with great upside potential.
  • It also has a high insider ownership of 6%.
  • Looking for a portfolio of ideas like this one? Members of High Dividend Opportunities get exclusive access to our model portfolio. Learn More »

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Co-produced with Beyond Saving

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This article was written by

Rida Morwa profile picture

Rida Morwa is a former investment and commercial Banker, with over 35 years of experience. He has been advising individual and institutional clients on high-yield investment strategies since 1991.

Rida Morwa leads the investing group Learn More.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of XFLT either through stock ownership, options, or other derivatives. 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.

Treading Softly, Beyond Saving, PendragonY, and Preferred Stock Trader all are supporting contributors for High Dividend Opportunities. Any recommendation posted in this article is not indefinite. We closely monitor all of our positions. We issue Buy and Sell alerts on our recommendations, which are exclusive to our members.

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 (279)

SleepyInSeattle profile picture
I picked up a few shares today as it has fallen unbelievebly hard.
I do believe it has not done falling, but "today" it was a much better deal than when this article was written.
NOT a core position and quite speculative. Will add on downturn.
@SleepyInSeattle Yes, I think now will be a good time to start taking a position in XFLT. I have been watching it since last fall. It may drift lower over the next year but I think share price will be higher at some point after this recession/whatever is behind us. In the meantime almost 13% won't be too bad.
Could you do an update on this one given earnings reporting.

Like your analysis...wondering if you still feel the same way.
Jeff Swan profile picture
It's a falling knife that just hit new 52 week lows today. How is this a hidden gem in a rising interest rate environment?
ButscherDoug profile picture
@Jeff Swan You could say the same thing for the FAANG stocks. GOOG, NFLX, AMZN all hit new 52 week lows today.
@Jeff Swan Down -11.18% today on no news to me implies insider trading on unreleased information. They will tell their friends, relatives, and whoever handles their secret accounts to SELL.
SleepyInSeattle profile picture
@Jeff Swan It isn't a gem at all. Highly leveraged, it will be crashed by high interest rates. Falling knife.
Howard CostaRica profile picture
I read this article again on Saturday and placed and order for additional shares. I looked at the futures market today and saw an across the board futures decline of 3% and canceled the buy order.

While living high on my dividend earnings (thank you Rida) doing a 2 month trip through Japan, I still keep an eye on the markets and my HDO articles.
ButscherDoug profile picture
@Howard CostaRica I far as I know futures open at 6 p.m. ET on Sunday.
Howard CostaRica profile picture
@ButscherDoug I'm in Japan and 17 hours ahead of NY.
Donggle profile picture
@Howard CostaRica dont ruin your vacation by watching the market! You will never catch the bottom. When its up 10% from here it will be safe to buy(course the easy money will be already made). Do not look at your principal, till you are even it was just a ROC!
sacking profile picture
So many changes in market complexity and direction since HDO last looked at this gem. I wonder what HDO thinks of XFLT now I've noticed that it's not getting slammed as much as other CEFs. Just wondering. Thanks.
PendragonY profile picture

We like it very much. It is one of the large positions in my portfolio.
Phil in OKC profile picture
@sacking I bought a 2% position back in AUG-SEP and it has behaved very nicely. This is a good price to buy today.
Jeff Swan profile picture
@Phil in OKC You must really like the price today then!
Is anyone still following this? I started to divest my XFLT holding because I hold a lot of OXLC and ECC and wanted to reduce my overall exposure to CLO's. So I then looked at which company recovered more quickly from MAR2020, and lo and behold it seems XFLT recovered back to it's price in about 12 months and the other two, as of now have not recovered to their prior price. At lease OXLC did not, ECC came back to about $14 in about 12 months - all 3 fell to $4-$7 range in Apr 2020. I would appreciate feedback, maybe I am getting rid of the wrong one? And, I had already soled 50% of XFLT when I decided to look at the charts. What am I missing?.
Donggle profile picture
@excenter Think we are the only two that care how fast an issue recovers!
The smokescreen is "river of dividends" as one author puts it, "safe" is another word to give you some comfort!
I want return of my investment before a return. Until you are even you are just getting paid your money back!
The market made about 40 news high!
lateralgs profile picture

I own XFLT, my wife has owned OXLC and OXSQ for years longer. My basis in XFLT is $7.51, not including reinvested distributions. The difference is basically expressed in the names of the funds. XFLT should recover and profit sooner in a rising rate environment, as the majority of their debt instruments have rising rate clauses.
@lateralgs Appreciated! Recovery time is not the only metric of concern, of course, mix of notes/equity and ratings of holdings do count.
@Rida Morwa I don't see anywhere that defines or explains the nature of the "Term Trust", would you be able to clarify this for us please?
PendragonY profile picture

The fund has an ending date. Currently, the fund is set to close on December 31, 2029. There are various methods that can extend this date.
@PendragonY Thank you sir, ok, I may of seen that somewhere, but mostly ignored it as not being necessarily material and am invested/investing anyway. What would be probability it just ceases to exist?
PendragonY profile picture

It won't just cease to exist. Whether or not the fund will liquidate at the current date isn't known or estimable at this time. There are a number of ways that the fund could continue past that date but aren't executable till 2028.
I decided to revisit XFLT and do a little more research now that I have some time and I reread the last two earnings calls. That helped a lot to explain this "hybrid" CEF that invests in CLOs and first-lien loans and a bunch of other things. It also reveals the two women who are on the earnings call appear to know their stuff and have a good sense of how they plan to make money. They spell out in more detail why CLOs are a good investment right now and how they appear to be set up to stay that way for a while. as well as the advantages of the bifurcated focus that underlies XFLT., which allows it to be nimble and adjust to market conditions.

Of course, they are pumping their own business, but my BS meter did not go off and what they said make sense - for now. I would own it with a sharp eye watching though. But for folks looking for some diversity in income streams I can see it makes sense alongside REITs, BDCs and other CEFs.
Tom W Dorsey profile picture
How should this perform in a rising rate environment? "Floating rate......"
Beyond Saving profile picture
@Tom W Dorsey They are 100% floating rate loans, so rising rates is a good thing if default rates remain equal. The headwind would come if default rates started rising. Then it is a question of whether the tailwind or the headwind is stronger.
Tom W Dorsey profile picture
@Beyond Saving Thanks, it was a rhetorical because seemingly every time rates climb, it sells off. We shall see. GL
Beyond Saving profile picture
@Tom W Dorsey You need to be a bit more precise about "rates" as there are various rates moving in different directions. The rates that matter for XFLT are 1-month LIBOR (and in a few years, SOFR), which haven't climbed. fred.stlouisfed.org/...

These short-term rates tend to be highly correlated with the Federal Funds Rate, which is what the Fed controls. So I don't expect a raise there in the near future. Fortunately, they are making very good money with those rates at rock bottom.
WW Burgess profile picture
XFLT expense ratio is insanely high (5.71%)
PendragonY profile picture
@WW Burgess

No its not. That includes the cost of leverage and is in line with similar funds. And the yield is NET of all expenses.
lateralgs profile picture

How many times?… 😜
Phil in OKC profile picture
@WW Burgess What makes it "insanely" high in your opinion? Are you concerned the expense ratio percentage is coming out of your pocket? Successful CLO management requires best of breed managers in this tricky and complicated sector.
Bossco profile picture
Rida & team, would you mind shedding some light, if possible, on why XFLT performed poorly 2018 to 2020 pre-covid? I'm forward thinking yet can't help but see the longer history Linear Regression, which is concerning. How does the present & likely future bolster XFLT over the pre-covid underperformance? My spidey senses are tempted to cement alpha profits soon if regression is higher probability than continued recent success. Tia! 😁
PendragonY profile picture

I suppose it depends on what you mean by "performed poorly" XFLT did better on a total return basis than BKLN (a senior loan index fund). And produced more income. And ha performed even better than that ETF since the COVID crash.
@PendragonY BKLN is a garden variety bank loan ETF, not a CLO carrying vehicle. The comparison is biased, no?
PendragonY profile picture
@User 5877411

First, XFLT makes loans just like what BKLN holds. Second, BKLN is also a good metric for the prices of the loans that go into CLOs. So I don't think the comparison is biased at all.
kjseagle1 profile picture
XFLT - 50 day avg is rising
Rida Morwa profile picture
@kjseagle1 Yes bullish on the technicals!
nm10066 profile picture
@Rida Morwa Rida, Morningstar has a 2 star rating on this CEF. Fees include: Advisor 2.47, Professional 0.61% Accounting 0.43%. Three year Risk rated in RED (high risk), while the rate of return is rated GREEN, (high return). Makes sense this is a high risk because that follows high reward. I don’t like Morningstar for individual stock picks but on funds they are probably someone we should consider before jumping into a fund. Mom and Pop investors might jump into this fund simply because it pays a monthly dividend without being aware it is also considered a high risk investment .
PendragonY profile picture

M* doesn't do a good job of rating CEFs. THey are best for open-ended mutual funds and for ETFs.
lateralgs profile picture

Pretty much agree with assessment of M* ratings. And even with their mutual fund ratings, the ratings are backward-looking comparisons to perceived peers. In that sense, you can get a good feel for how given funds have performed within their comparative sectors and asset classes, but even then, you need to look at things like manager tenure and so on. Since those fund ratings are against peer groups, it is possible to have a 4* or 5* fund that has a negative return over a given time period, simply because it has “lost less” than the vast majority of its peers (!).

Conversely, their individual stock ratings are quantitative for most stocks, and reflect not a comparative rating vs. perceived peers, but a rating based on current share price vs. their estimate of fair value, with ranges from “strong buy” to “strong sell.”

In other words, if “you” are going to utilize their ratings for any purpose, understand what the ratings indicate. The simple star rating system is not consistent in meaning across the platform.

I would also note, until very recently M* had XFLT rated as 1*. So 2 is actually a recent bump up, for whatever that’s worth…
PendragonY profile picture

"In other words, if “you” are going to utilize their ratings for any purpose, understand what the ratings indicate. The simple star rating system is not consistent in meaning across the platform."

XFLT is just too much of a black box mystery money machine for me. I think I'll stick w triple net REITs and such.
Donggle profile picture
@cpr1200r100 isnt triple net mostly office space? Work from home?
@cpr1200r100 agreed. This is sophisticated stuff at a high level. I am impressed at the knowledge Rida and Pendragon show in this discussion, as well as SA posters. All helpful. They say to invest in what you know, and this is all above my skill level. Would I buy 100 shares to park funds and to learn more? Possibly for that yield, with a very watchful eye and quick trigger finger.
PendragonY profile picture

Thanks for the very nice compliment. I am glad to share what I know and hope readers find it helpful.
For everyone investing in this type of fund, please be aware that the CLO equity tranche portion of the fund is levered approximately 10 to 1 to the underlying leveraged loans of the CLO. Further, CLO equity is not rated so its a bit misleading to talk about a CLO default rate that only includes CLO debt and not CLO equity. CLO debt may not default but its the first loss CLO equity that absorbs all the underlying loan portfolio defaults, so its quite possible that a CLO equity tranche may lose money while the CLO debt tranches get paid in full. That's not to say that a fund like this can't perform exceedingly well in the right part of the economic cycle, but just know that there is a lot of downside MTM risk if leverage loan prices fall dramatically.
PendragonY profile picture
@Structure Credit investor

The default rates are for the borrowers in the CLO, so you are misunderstanding what the default rate means.
@PendragonY . The Author quotes that CLO defaults are incredibly rare with a 0.36% default rate since 1996. He shows a table of "Global CLO lifetime ratings transitions and defaults" .This is for rated CLO debt and not the underlying rated leveraged loans. Almost all the defaults in this table would be generated from originally rated double-B or single-B CLO debt tranches. That tells you nothing about the performance of the CLO equity tranche since a "CLO default" is defined as a default of the rated CLO issued debt tranche. A CLO equity tranche can get virtually wiped out without a CLO fund's issued debt defaulting. The leveraged loan default rate did spike in 2020 and that hit CLO equity returns considerably. I am not saying you can't make money on this, I am saying understand the risk / reward here and have a good idea of what you are investing in. In my investing career, I have seen savvy institutional investors turn to jello due to the price volatility of a CLO equity tranche, even though the CLO funds did not default on their issued CLO debt. For example a 1% drop in the price of the underlying leverage loan portfolio can generate close to a 10% drop in the price of the CLO equity tranche. Take a look at "ECC" in 2020
PendragonY profile picture
@Structure Credit investor

Look further up in the article where this is an extensive discussion about the LOANs and their very low default rates. And again, with low loan default rates and low CLO defaults, the CLO equity tranches will do well if held to maturity, even if at times the cash flow slows.
How do you suggest a 9.8% yield with an expense ratio that exceeds 5%
Rida Morwa profile picture
@patafs Managing CLOs requires active daily management, and many staff to do so. This is unlike other CEFs where they manage or rebalance on a monthly basis with minimum staff. This is why all CLO funds have a high expense ratio. The bottom line is that a successful CLO fund is able to pay a high yield and cover its payout. In this case, you get 9.8% net in your pocket.

All the best,
PendragonY profile picture

Why wouldn't we suggest a fund that has a yield of 9.8%? Why wouldn't we like such an attractive payout? Since the payout is NET of expenses, why are you so concerned about it?

I think the concern about expenses is misplaced here. In a passively managed ETF, performance is lower than the benchmark index based on fees. But in an actively managed fund, there is no such connection to an index. Look at the income and returns and don't worry about the fees.
Now is not the time to be buying into a large stash of CLO equity stakes.
PendragonY profile picture

Its not a good time to buy when the price of CLOs is still relatively low but the companies that owe the debt are in a strong position?
@PendragonY CLO equity is so highly levered that it is more dependent on financial condition easiness than on anything else. With the Fed tapering now and rate hikes within a year, financial conditions will become more negative. And CLOs will feel that much faster than less levered credit plays.
PendragonY profile picture

The Fed is tapering because the economy is strong, which will help the borrowers and thus make CLOs stronger.
RigaProf profile picture
Retail investors can access senior loans through an FCA-regulated British platform WiseAlpha.com. This asset class is being democratized.
PendragonY profile picture

I still much prefer using actual experts who work on this full-time

Also per WiseAlpha.com, "Our services are directed at and intended to be used only by those persons categorised as Self-Certified Sophisticated, High Net Worth or Professional investors.".
To the naysayers;
XFLT has been very good as follows, 1000 shares bought in last 11 months is up 12.72 %, plus $.073/month/per share.
12-20 300 up 28.50%
1-21 200 up 22.53%
7-21 300 up 1.45%
8-21 200 up 5.42%
I use $XFLT as a place to stash cash and get paid handsomely along the way. Thinking about selling the first 300 after ex div date, thus collecting the dividend 13 times in some 370 days, that should qualify for long term capital gains tax rate.
Then I will have the Jan bunch to consider doing the same. Looking to add a couple round lots in next couple months.
XFLT is not a buy & hold stock, but it can make some great money for us.
All the regular posters know this, but new pholks maybe no so much. Dividend income is a Wonderfull thing. Set a goal, like enough monthly div income to pay your cell phone bill, once that is achieved, raise that bar to include something else
like your monthly cable bill. 2 years ago my monthly divs amounted to about $10, is over $500 now.
Thanks again HDO for putting. my head together back then, I should have listened sooner!
Rida Morwa profile picture
@nocnurzfred You are very welcome, I'm glad you're seeing success!
PendragonY profile picture

I have been buying XFLT a bit longer than you, but I too have been very well treated by the fund.
Donggle profile picture
@nocnurzfred the big secret, anything bought after the 20 crash, hard to lose money. A Look at the left side of the chart to get a real picture of the future. I took my 20 crash trades off the table! My best trades were way above their pre level crash + fast, the dogs some just came back to pre 20 crash levels, bring up the rear! A portfolio of XFLT before 20 crash you almost got principle back! Cash does not go down in a downturn. You need real cash to pick up bargins!
Interesting fund but 13% premium to NAV keeps me on the sidelines.
SleepyInSeattle profile picture
@CitronSource Likewise.
lateralgs profile picture

If April 2020 was too scary, the time to buy was July through September 2020 when it consolidated. Looked good again in November and December. Getting nearer to a lower sell range this week, but I’m waiting for $11. If it doesn’t get there, I’ll take the distribution instead of reinvesting above $10.
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