Scalper1 News
Summary The market cannot be any more clear. If you want to make money in this market, buy what has been working and ignore everything else. Indeed, every rotation head fake that seemed to finally benefit the “have not” sectors has only been an opportunity to sell and add more to the “have” sectors. Perhaps we’ll see another rotation at the beginning of 2016 but if history is any guide, the last few years has shown that trying to play a rotation is futile. Has anyone seen such a vast difference in sector performance than what we are seeing today? Just a month ago, I wrote this article, The Chasm Between What Works And What Doesn’t , and since that time not only has it gotten worse, its gotten a lot worse. In fact, it’s gotten to a point where if you want to play CEFs, which generally have not kept up with their ETF benchmarks, at least at the market price level, you have to play what’s working. And what’s working are funds which invest primarily in the large-cap technology sector. Yes, healthcare, banking and a few other sectors also are working but if you really want to follow what every institution is throwing all their weight behind here at year-end 2015, it’s large cap information technology. And what CEFs are best positioned for that? Well, let’s go to the scoreboard and see which equity CEFs have had the best YTD NAV total return performance. The following 35 funds represent the best NAV performances compared to the S&P 500 (which I use as a general benchmark for all equity CEFs). Funds in green in the YTD NAV Tot Ret column have seen their NAVs outperform the S&P 500, as represented by the SPDR S&P 500 Trust (NYSEARCA: SPY ), which is up 3.4% YTD through December 4th, 2015, including dividends. NOTE: The S&P 500 is generally quoted without dividends and is up 1.6%. (click to enlarge) Buying What’s Working At A Discount No other fund family has more equity CEFs working than from Eaton Vance , though I think you have to be selective at this point. My No. 1 pick is the Eaton Vance Enhanced Equity Income II fund (NYSE: EOS ) , $13.60 market price, $14.75 NAV, -7.8% discount, 7.8% current market yield . EOS has been a favorite of mine since 2011 and I have always maintained a position in it though I have added and reduced over the years depending on its valuation. And if you want to go on its current valuation, EOS is a buy again. This is reflected in EOS’ YTD Premium/Discount chart in which EOS has moved back down to almost an -8% discount, its widest all year and even wider than when I first wrote about EOS all the way back in February of 2011, EOS: A Compelling Valuation After A 2-Year Wait . (click to enlarge) Back in early 2011, EOS was trading at a -6.8% discount, which seemed wide at the time considering EOS often traded at a premium of 5% to 10% since its inception in early 2005. But a series of distribution cuts for all of the Eaton Vance option income CEFs beginning in 2010 and continuing through 2011 dropped their valuations to double-digit discounts of up to -16% in the fall of 2011 despite their NAVs beginning to show a turnaround. I wrote many articles during this time frame arguing that the distribution cuts were necessarily and would ultimately benefit the funds in the long run. So despite most investors giving up on the Eaton Vance option-income funds during this time and driving them down to valuations not seen since 2009, anyone who took my advice and bought these funds during this period has enjoyed one of the great runs of any family of CEFs. Today, the Eaton Vance option-income CEFs are probably the most popular equity CEFs to get exposure in the large cap information technology sector since virtually all of them own Apple (NASDAQ: AAPL ) , Alphabet/Google (NASDAQ: GOOG ) (NASDAQ: GOOGL ) , Facebook (NASDAQ: FB ) , Amazon (NASDAQ: AMZN ) and other strong performers in their top 10 holdings. In fact, they have become so popular that a couple, like the Eaton Vance Tax-Managed Buy/Write Opportunities fund (NYSE: ETV ) and the Eaton Vance Tax-Advantaged Buy/Write Income fund (NYSE: ETB ), now trade at the high end of their valuations with ETV at a 3.1% market price premium while ETB trades at a 5.4% market price premium. ETB, in particular, has gotten significantly ahead of itself based on its NAV performance and I would be swapping out of ETB and into EOS or really any other Eaton Vance option-income CEF at this point. ETB got a bump after a positive Barron’s article two weekends ago in which a money manager brought up its long-term outperformance over the S&P 500. That’s true, and I had been pointing out ETB’s outperformance at the NAV level for years, but ETB and indeed, ETV, are very defensive option-income CEFs and just because their NAVs have outperformed since inception, i.e. throwing in the 2008 financial crisis, does not mean that they are the best funds to own in a strong information technology stock-driven market. This is shown in the following table in which I re-sorted all of the equity CEFs by their NAV total return performance since 2012 when the ramp up Nasdaq-100 stock boom really got started. (click to enlarge) And if I just include the Eaton Vance option-income CEFs from the above table, this is how they have performed since 2012. (click to enlarge) As you can see, the lower the option % under Income Strategy , the more upside capture the fund generally offers. So in a continued up market, particularly if information technology continues to lead, you’re going to want to own EOS first over any of these funds. And at a -7.8% discount compared to ETB’s 5.4% premium despite both funds having similar 7.7% market yields, it’s not even a question. In fact, at a 7.1% NAV yield, EOS will probably be the first Eaton Vance option-income CEF to be in a position to raise its distribution if this technology rally continues. On the other hand, if you believe the markets are topping out and you want to consider a more defensive option-income CEF, I would swap out of ETB again at a premium and go into ETJ at an -11.7% discount and a much higher 11.0% current market yield. ETJ is the most defensive of all the Eaton Vance option-income funds due to its 95% put option collar in addition to writing 95% call options on its US-based stock portfolio. That uber defensive option positioning is why ETJ has the lowest total return of the group since 2012, both in NAV and market price but it also means ETJ will hold up dramatically better at the NAV level should the markets and primarily the S&P 500 weaken. But what I find surprising so far in 2015 is that despite ETJ’s extremely defensive risk-adjusted strategy, its NAV performance has significantly improved over years past and not only is it beating the S&P 500 by being up 3.5% YTD, it’s not that far behind ETB’s total return NAV performance of 4.6% YTD. I hadn’t always endorsed ETJ because historically its added put collar expense had been a major drag on performance. But obviously, Eaton Vance has found a way for the fund to load up on outperforming stocks while keeping its S&P 500 index option writing and put collar strategy in place at a reasonable expense. The bottom line is that the Eaton Vance option-income CEFs are a great way to get exposure to the large-cap information technology sector at a discount. All you have to do is choose which defensive option strategy suits your needs. Conclusion The Eaton Vance option-income CEFs certainly represent what is working in this market though you have to be selective during this period. Year end is one of the volatile times for equity CEFs as many investors use these funds for tax-loss selling and institutions often make big changes either due to forced selling/buying (hedge fund redemptions) or for re-balancing. Just last week, one of the other popular Eaton Vance option funds, the Eaton Vance Tax-Managed Global Buy/Write Opportunities fund (NYSE: ETW ) , $11.33 market price, $11.92 NAV, -5.0% discount, 10.3% current market yield , dropped on huge volume from some institutional investor who was probably just liquidating after seeing such a large run in the fund since 2012. ETW, which I also had reduced significantly before last week, had risen to almost a par valuation just two weeks ago, something the fund hasn’t seen for years. Here is ETW’s five-year Premium/Discount chart. (click to enlarge) This is what is going on in this market for the “what’s working” stocks and funds, though how long this can last while the “have not” crowd continues to plummet is the question. Though I never thought I would recommend investors swap out of a “what’s working” fund like ETB, I don’t get married to any CEF forever either. Just so you know, I wrote more positive pieces on ETB than any other CEF during 2011 and 2012. So how long can this go on for? Well, if you use 1999 as a template in which the Nasdaq rose something like 86% in the span of six months from September of 1999 to March of 2000 while the breadth of the overall market continued to narrow, I guess we have a little ways longer to go. Of course, back in 1999 the Nasdaq traded in fractions of 1/2 point, 3/4 point up to 1 point or even 2 point spreads. That means most technology stocks on the Nasdaq traded with $0.50 to up to $2 spreads between bid and ask. Today, the Nasdaq uses decimals in which spreads, even for the high flying Nasdaq stocks, are often quoted in just pennies. You don’t have to be a genius to figure out that its a lot easier to move stocks up or down with very wide spreads than very narrow spreads so even though it has taken a few years this go around to move the Nasdaq back up to all time highs, thanks to Quantitative Easing and buybacks, I think the end result will be the same, particularly in a rising interest rate environment. As such, I think the Nasdaq peaks sometime before February of next year. Scalper1 News
Scalper1 News