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The Chemist's CEF Report Picks Continue To Outperform Over Benchmarks

In the monthly Chemist's CEF Report (latest public edition here), I choose my top three picks of each month which are based on my consideration of the data as well as my qualitative judgment. The three picks generally have a decent combination of yield, premium/discount and z-score/distance values. Note that subscribers to the Cambridge Income Laboratory receive the picks 1 month in advance of the general public.

As stated at the end of the reports, me designating a fund as a top pick does not mean I am encouraging subscribers to buy the fund, nor am I necessarily going to include the fund in the Cambridge Income Laboratory portfolio. Moreover, note that some of the picks may have a narrow mandate (e.g. utilities stocks or MLPs), and therefore each investor should consider their own investment objective and risk tolerance before deciding to invest money into any of the picks.

With the ninth Chemist's CEF report just recently published, I thought it would be interesting to look back at all of the picks that I have made over the past half a year and see how those picks have fared against their benchmarks (see here for the previous update post). I chose three ETFs as benchmarks:

  1. SPDR S&P500 ETF (NYSEARCA:SPY) representing U.S. equities.
  2. Cambria Global Asset Allocation (BATS:GAA) representing the ultimate passive portfolio as it consists of the universe of investible assets in their market capitalization-weighted proportions.
  3. YieldShares High income ETF (NYSEARCA:YYY) representing a basket of high-yielding CEFs. Considered to be the most appropriate "apples-for-apples" benchmark for the picks.

It should be stressed that these picks aim to take capitalize on premium/discount reversion, which usually occurs in the time frame of months rather than years. Therefore, I only compare the 1-month, 2-month and 3-month cumulative total price return values for the picks against the benchmarks. These picks are not intended to be "buy-and-forget" holdings - for those types of investments, other factors such as distribution stability or management quality might be considered that are not considered here.

The picks are presented in reverse chronological order. If you want to receive the Chemist's CEF Report (including the picks), please consider joining the Cambridge Income Laboratory. A two-week free trials is available for a limited time only.

Note that the values in the tables are sourced from Morningstar and may differ slightly from the numbers in the YCharts return charts.

Apr. 2017

Picks were PHT, AWF, and EOS. Over 1 month, the three picks have averaged +3.33% beating SPY (+1.02%) and GAA (+1.10%), but slightly lagging YYY (+3.50%).

YYY Total Return Price Chart

YYY Total Return Price data by YCharts

Mar. 2017

Picks were PHT, MAV, and GRF. Over 2 months, the three picks have averaged +2.96% beating all three benchmarks.

YYY Total Return Price Chart

YYY Total Return Price data by YCharts

Feb. 2017

Picks were PHT, MAV, and CII. Over 3 months the three picks returned +4.48% which lagged SPY (+5.13%) and YYY (+4.59%) but beat GAA (+3.38%).

YYY Total Return Price Chart

YYY Total Return Price data by YCharts

Jan. 2017

Picks were GER, MFD and ETY. Incredibly, all three of the top picks have outperformed all three of the benchmarks over all three time spans! After 3 months, the average of the three picks was +12.18% while the average for YYY was +4.92%.

YYY Total Return Price Chart

YYY Total Return Price data by YCharts

Dec. 2016

Picks were ETY, MFD and IGA. The three picks showed strong performances after 3 months, with an average +9.78% return beating all three benchmarks. The average of the three picks beat YYY over 1, 2 and 3-month time frames.

YYY Total Return Price Chart

YYY Total Return Price data by YCharts

Nov. 2016

Picks were ETY, EVN and KYE. All three picks showed good performance after 3 months, even though EVN lagged in the first two months. After 3 months, the three picks averaged +6.44% which underperformed SPY (+7.72%) but bested GAA (+1.98%) and YYY (+4.15%). The average of the three picks beat YYY over 1, 2 and 3-month time frames.

YYY Total Return Price Chart

YYY Total Return Price data by YCharts

Oct. 2016

Picks were GMZ, KMF and GRF. All three picks showed strong performance after 3 months, even though in the first month GMZ and KMF (both MLP CEFs) struggled. After 3 months, the three picks averaged +5.96% which substantially outperformed SPY (+3.80%), GAA (-1.34%) and YYY (-1.44%). The average of the three picks beat YYY over 2 and 3-month time frames.

YYY Total Return Price Chart

YYY Total Return Price data by YCharts

Sep. 2016

Picks were UTG, CBA and MFD. UTG showed strong returns over three months while MFD was a laggard. After 3 months, the three picks averaged +0.93% which underperformed SPY (+1.82%) but bested GAA (-1.89%) and YYY (-3.96%). Notably, the average of the three picks beat YYY over 1, 2 and 3-month time frames.

YYY Total Return Price Chart

YYY Total Return Price data by YCharts

Summary

As I have stated many times before, I do not consider the S&P 500 an appropriate benchmark for my CEF strategies and portfolios given that CEFs can invest in a much broader range of assets compared to only U.S. large caps. However, I still include it for comparative purposes. I believe that more appropriate benchmarks for the top three picks are GAA, representing the ultimate passive portfolio as it consists of the universe of investible assets in their market capitalization-weighted proportions, and especially YYY, a basket of high-yielding CEFs that is the 1x leveraged version of the hugely popular ETRACS Monthly Pay 2xLeveraged Closed-End Fund ETN (NYSEARCA:CEFL).

The above results show that the performance of the Chemist's CEF report top three picks have been very strong, and have performed even comparably with the S&P 500 which has itself recently pushed to new all-time highs. Here, one might point out that the my CEF picks have been boosted by recent increases in premium/discount values (see "The Chemist's CEF Report - February 2017: Caution As CEFs Slightly Overvalued"). This is true, of course, but when you compare the top three picks with YYY, which is also comprised solely of CEFs, the outperformance is not lessened, and in fact becomes even more dominating. As described above, the average of the top three picks has regularly bested YYY over 1, 2 and 3-month time intervals, even though YYY should also have benefited from the boost in global premium/discount values.

The chart below shows the average 1-month (n = 8), 2-month (n = 7), and 3-month (n = 6) price performances of the Chemist's top three picks, versus the comparable performances for YYY. The data clearly indicates that by focusing on individual CEFs that show signs of significant undervaluation (coupled with an attractive yield), we can generate outsized returns compared to a basket of high-yielding CEFs such as YYY. The chart below shows that the Chemist's picks have doubled or more than doubled YYY's return over 1, 2 or 3-month time periods.

Hopefully, some of you have been able to benefit from the strong performance of the Chemist's CEF picks over the past 9 months. Let's hope for an equally strong performance in the months ahead!

If you have enjoyed my article, please consider clicking the "Follow" button next to my name to be alerted to new content! Members of the Cambridge Income Laboratory (#1 on Marketplace for ETF category and #2 for CEF category) are alerted of my best trade ideas in advance, can view my personal ETF/CEF income portfolio and have early access to my monthly CEF and ETN reports. A free 2-week trial is available for a limited time only. For more details on what members receive visit here.

Disclaimer: Past performance is not a guarantee of future results. Picks are not to be construed as solicitation to buy or sell any security. All investment involves risk, including of complete capital loss.

Disclosure: I am/we are long THE PICKS.