Covered call closed-end funds in Business Week (LCM, JSN, EOS, NFJ, BEP, IGD, DPD, ETB, HCE, MSP, NAI, EEF, JLA, BOE)

by: Roger Nusbaum

The Businessweek dated July 4 has an article (I don't know if I utilized my subscription to access the article) about closed end funds that sell call options to create income, writes Roger Nusbaum. I have written about this product numerous times because I think it can be useful in a properly diversified portfolio.

Tim Middleton from MSN posted his ETF Portfolio update for the quarter. He said that his position in EFA held back the performance so he is going to reduce his foreign exposureCef
These types of funds have many detractors. The negative take on these is that they can go down a lot if the market drops a lot and that they can not go up a lot if the market goes up a lot. I first started writing about these last October. I think my take on these is unique, I have never read an article that shared the same opinion that I have. I do not expect these funds to keep up with a roaring bull market but I also do not expect them to drop nearly as much in a nasty selloff either. I think of these as more of a fixed income vehicle (but by no means should this be your only fixed income product). In their short history they have been less volatile than stocks and less interest sensitive than bond funds which is what I have been saying about these all along.

Most clients have exposure to this product but like anything else I own portfolio performance for won't be made or broken on this one tool.

The article takes a generally negative slant toward these funds which is fine. The thing I find weird is the author's use of the word bubble to describe the popularity and amount of issuance. People are not getting rich with these, there is no mania involved and a bad outcome for these, I think, won't be financial ruin but might be that too many funds selling options will depress premiums.

I am not saying this will absolutely happen but there is visibility. It makes sense to know the downside of what you own.

As I look at the list from B-week there are a lot of funds I am not familiar with and some of them are so new that there is not much info available. For example the Madison Strategic Sector Fund(NYSE:MSP) doesn't have any info on Yahoo Finance and even the Claymore Securities site (that is the fund sponsor) has no information either. ETFconnect had no mention of call options in its description which I found odd. It just said high income.

One fund that caught my eye was the Blackrock Global Opportunities Equity Trust (NYSE:BOE). This is a very new fund, I couldn't find any info at Blackrock's website and the description at ETFconnect was very confusing. As I can find more information on this one I will pass it on, but it is the global aspect that interests me.

The one on the list above that stuck out as surprising (in a negative way) to me was the Dow 30 Premium & Dividend Fund (DPD). It will only own stocks in the Dow 30. The strikes me as a very narrow universe to be limited to.

One thing the article mentioned was that a lot of these new funds still trade a premium to NAV because they are so new. You are probably better to wait on these.

While I wish there were less of these funds being issued I think this continues to be an evolving product. Most of these funds are benchmarked to the CBOE Buy Write Index (BXM). What I'd like to see next is a CEF that captures the Australian Buy Write Index. I also think this would be handy for other foreign markets too.

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