Scalper1 News
Summary Overselling mostly done in the junk bond space. I am buying for my retirement portfolio: CEFL – over 21% yield. Components of CEFL are trading at heavy discounts, and the security is on the rebound. CEFL: An opportunistic buy. Following my latest article on my high-yield “Model Retirement Portfolio” (6% Dividend Target) published Monday (December 14) on Seeking Alpha, recommending dividend investors to start buying the UBS ETRACS Wells Fargo Business Development Company ETN (NYSEARCA: BDCS ), the shares of the ETN have rallied around 3%. I believe there is much more upside to come, as the sector is still oversold with no real merit. If you have not started to buy, it is not too late. For those who have opted to buy the leveraged version, the UBS ETRACS 2X Leveraged Long Wells Fargo Business Development Company ETN (NYSEARCA: BDCL ), the shares closed over 6% up since Monday. I promised in my Monday article to give an update on the best time to start accumulating on junk bonds. Well, the time has come! I will provide guidance on the best approach. Update on the Junk market space The sector recently experienced heavy losses and a meltdown , leading to heavy redemptions by investors. This was sparked by rock-bottom levels of risk tolerance, persistent downside risk to commodity prices, and turmoil in emerging markets. However, recent comments from high profile investment banks have calmed down the markets: UBS (NYSE: UBS ) reported last Monday: Junk bonds sell off, oil drop worries are overdone. The Chief Investment Officer at Guggenheim Partners stated: There is a “buy” signal for junk bonds. A Goldman analyst stated that investors are being too pessimistic . BlackRock’s Senior Director stated on Monday that junk bonds won’t spark a new crisis. It will be contained. Tracking this sector, the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEARCA: HYG ) and the SPDR Barclays Capital High Yield Bond ETF (NYSEARCA: JNK ) both ended the week with returns (before dividends) of 1.66% and -0.18%, respectively, during the last 5 trading sessions. This is despite heavy losses for the week sustained in all the major indexes. So it looks like we are close to a bottom. Best way to enter the Junk Bond Space To be prudent, I am not investing directly into the junk market ETFs. I am investing with a much more balanced approach using the UBS ETRACS Monthly Pay 2xLeveraged Closed-End Fund ETN (NYSEARCA: CEFL ), a leveraged Exchange Traded Note issued by UBS with a stated yield of over 26%. What exactly is CEFL? CEFL is a fund of “closed-end funds” (basically a fund of funds) issued by UBS. It comes in the form of an exchange-traded note (ETN) linked to the monthly compounded 2x leveraged performance of the ISE High Income index. Its objective is to capture the top 30 closed-end funds as determined by a ranking scheme, allowing investors to take advantage of both event-driven news and long-term trends of the U.S. closed-end fund marketplace. The note is leveraged, so it pays approximately twice the yield of the related index, which comes with a stated yield of 21.78% ( UBS ). The dividend is paid monthly via a variable monthly coupon. CEFL’s top ten components (making up 45% of total holdings) are depicted in the following table, which includes the weight of the security and the discount to net asset value (NAV) and return of capital for 2015. (click to enlarge) Advantages of Investing in CEFL Now: CEFL is not a pure junk bond play. It is a very diversified product which includes, among others, preferred shares, mortgage backed securities, corporate bonds, junk bonds, emerging market bonds, foreign government bonds, investment grade corporate bonds, high yield corporate bonds, and even certain stocks. It offers one of the most diversified ways to invest in the high-yield bond space, as it is basically a “fund of funds”. The security has been selling off since the beginning of the year, both from worries of higher interest rates and from the junk bond crisis. The shares have lost, after dividends, over 17% of their value. Signs of life and rallying the past week: CEFL is up 5.8% during the last 5 trading sessions. This is despite the heavy losses sustained in all the indexes. The S&P (NYSEARCA: SPY ) was down about 1.2%, while the Dow Jones Index (NYSEARCA: DIA ) was down 1.4%. It is a good time to catch them on the way up. CEFL components are still trading at a heavy discount to net asset value. As seen on the table above, the average discount of its 10 top components is 13.1%. So this security is on fire sale. CEFL provides exposure to emerging markets through its bond portfolio. With certain analysts predicting that emerging markets will start recovering in 2016 and 2017, along with the prices of commodities, CEFL will benefit from such a recovery. Several investment bankers, including Goldman, Guggenheim, UBS, and BlackRock, have just started being optimistic. Now that the fears of high rate increase by the Fed have started to dissipate (only 0.25% hike and prudent approach to future hikes), I expect the security to do well in the short and medium term. Other Important Information on CEFL: Not all the stated 21.78% yield is actual dividend. Part of it is a return of capital as some of these funds had to return part of the investment to their shareholders in order to maintain yield. If we have a look at the table above, the average “return of capital” for the 10 largest holdings is 15.3% for the year 2015 (to-date). If we assume the same percentage for all the securities, that will give CEFL an effective yield of 18.4%. CEFL’s dividend is also variable. The security of CEFL is twice leveraged. So any price movement in the underlying securities will have a double effect. Expect volatility, but do not worry much, the fundamentals are good. It may be wise to spread small purchases during a period of one week. Try to average down during down days. Conservative Diversification Please note that I use conservative diversification to protect my “high dividend portfolio”. I have started buying CEFL but will only allocate around 3% of my total portfolio to the security, especially due to the leverage effect. I advise investors to also take a prudent approach. For this investment, I am happy to get a dividend of over 20%, which means in 5 years, I should have all my capital back and the rest is pure earnings generating additional income. Get alerts for “My Model High-Yield Retirement Portfolio” (6% Dividend Target) I am currently sharing future opportunistic additions to my “Model Retirement Portfolio” (6% Dividend Target), for which I often use ETFs and CEFs to protect my “egg nest” against volatility and against the risk of investing in a single security. Furthermore, my conservative strategy includes scrutinizing and generally avoiding excessively high dividend securities, which may lead to disproportionate risk taking and heavy losses. My target is to have a conservative and well-balanced high-yielding 6% dividend portfolio to generate long lasting income and protect against inflation. Please follow me if you are looking for dividend safety, diversification, and sound investment ideas. Scalper1 News
Scalper1 News