How We Gained +7% "Free Shares" Of This PIMCO Fund
ETF investing, CEFs, Dividend Investing, Portfolio Strategy
Seeking Alpha Analyst Since 2014
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- An example of a "swap trade" alert we posted to our members last week.
- We gained +7% "free shares" of PFN in 9 months via our CEF rotation strategy.
- With PFL still being around +1.5% more expensive than PFN, this trade is still in play for holders of PFL.
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Note from Stanford Chemist: This is a copy of the trade alert that we posted to our members last week, highlighting how our swap trades can be used to gain "free shares" of our favorite positions. In this case, we have gained +7% of free shares of PFN in 9 months, equivalent to DRIPing 9 months' worth of distribution for free! Importantly, no market timing is required with this strategy as we are invested in either PFL or PFN at all times. Our members have a step-by-step guide on how to execute our patented CEF rotation strategy here.
Want to follow along with our portfolios and trade alerts? Join us on a two-week free trial here: CEF/ETF Income Laboratory.
Around 8.5 months ago, we did this...
Today, we're swapping back from PFL to PFN to gain +7% "free shares" of PFN in 9 months.
- Sold: PIMCO Income Strategy Fund (PFL) (~7% allocation) at $11.53 (1020 shares)
- Bought: PIMCO Income Strategy Fund II (PFN) (~7% allocation) at $10.04 (1170 shares)
The reason for executing this swap was that there has been a recent divergence between the valuations of these two "twins", with PFL being over 2 points more expensive than PFN.
While a 2% differential isn't normally enough for us to make a swap, we were also fortuitously aided by slightly better NAV performance for PFL compared to PFN, when we made the last swap 8.5 months ago.
Over long periods, PFL and PFN do track each other very closely so squeezing out 7% "free shares" of PFN in less than a year is still a very decent result! Especially for a very solid fund like PFN (or PFL).
To put this into perspective, this 7% share count increase for PFN is equivalent to DRIPing 9 months' worth of distributions from PFN "for free"!
How did we arrive at the +7% increase of PFN shares? 8.5 months ago, we sold 1090 shares of PFN at $6.61 ($7205) to buy 1020 shares of PFL at $7.07 ($7211). Today, we're selling those same 1020 shares of PFL at $11.53 ($11761) to buy 1170 shares of PFN at $10.04 ($11747). Hence, we got 80 shares of PFN "for free" (worth ~$800), or a percentage increase of over +7.3% in 8.5 months! (equivalent of DRIPing 9 month's worth of PFN for free!).
PFL returned +74.54% in total return over 8.5 months, consisting of +63.08% in capital gains and +11.46% in distributions.
Here's the history of our share counts in the PFL/PFN pair since inception of the portfolio on February 1, 2017. Remember, no DRIPing was required: the share growth came from CEF rotation alone!
- PFL: 920 (Feb. 1, 2017) --> 960 (Feb. 14, 2019) --> 1020 (Mar. 23, 2020)
- PFN: 1060 (Jun. 12, 2018) --> 1090 (Jun. 19, 2019) --> 1170 (Jan. 7, 2021)
Please note two things:
- First, PFL and PFN are both high-quality multisector bond funds from PIMCO that can be held for the long-term. If one misses their desired price for swapping, or simply wants to hold PFL rather than following the portfolio, they can continue to do so. This is especially because the last swap (PFN-->PFL) 9 months ago was made during the March crash, so whether or not it is worth it for an investor to swap will depend on their entry prices they used if they had followed that trade alert.
- Secondly, while the PFL/PFN spread is the highest it has been this year, note that during 2018, PFL had periods where it traded at even higher valuations relative to PFN. Therefore, it is very possible that we're "too early" with this swap, that PFL would continue to move higher than PFN.
Analyst's Disclosure: I am/we are long PFN.
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