Tag Archives: author

You Can Buy This 11.2% Yielding, Unleveraged Equity CEF Without Paying A Premium

STK pays a distribution yield of 11.2%. The fund is an unleveraged, option-income CEF in the technology sector. There are only five unleveraged, domestic-equity CEFS with positive returns TTM. STK has the highest yield and largest discount of that set. Let’s start with a tale. There’s a domestic-equity closed-end fund that is paying an 11.2% distribution from a quarterly payout that has been stable since the fund’s inception over five years ago. It is one of only five unleveraged, domestic-equity CEFs that is in positive territory TTM; the other four are well-covered CEFs with lesser distribution yields. Its investing strategy is conservative, focused on covered-calls to generate income. At least here on Seeking Alpha, it stays well under the radar with essentially no attention from the site’s contributors. Impossible, you say? Well take a look at Columbia Seligman Premium Tech (NYSE: STK ). I’ve been writing about this fund for two years . If any other Seeking Alpha contributor has paid any attention to it, it’s not obvious. Put STK in the search box and the only thing you get is a few articles by Left Banker. Readers are no more interested than Seeking Alpha’s authors: those articles are solidly among my least. Despite its impressive numbers, STK remains about as unnoticed as a fund can be on this site. STK has $254M in AUM, which places it as a mid-size equity CEF. Trading volume is modest but not so low as to present exceptional liquidity problems. The fund invests in the technology sector. Management looks for capital appreciation from the portfolio holdings, and generated income from a covered call option-writing strategy. Calls are written on the Nasdaq 100 or its ETF equivalent on a month-to-month basis. The aggregate notional amount of the call options will typically range from 25% to 90% of the underlying value of the fund’s holdings on common stock. The fund has a managed distribution policy. It pays $0.4625 quarterly and has done so since its inception date. There had been considerable return of capital earlier, but in the last two years RoC has totaled only $0.37. At its current price, that is an 11.15% yield, just about its midpoint for the past two years. (click to enlarge) The fund has faltered along with the tech sector since mid-year, but even so it has a 1-year total return of 4.15% which places it 18th of 192 general equity funds indexed by cefanlayzer . Of those 192, only 40 are positive for this stat. Return on NAV TTM is 3.08%, which places 25 of 192 funds. STK is unleveraged. Some 60% of the 192 funds in the general equity category use leverage greater than 5% to enhance their yields. Leverage comes with risk, of course, an important risk factor that STK avoids. The fund had been priced at a premium as high as 10%. Since mid-summer, that has fallen to a discount reaching -6% early in September. The discount is climbing again and stood at -0.72% at Friday’s close. (click to enlarge) Annual portfolio turnover is 60%. As of the end of July, the top 10 holdings were: (click to enlarge ) It is the highest yielding of the 12 equity CEF that are both unleveraged and have a positive return for the last 12 months. Only five domestic equity funds pass those filters; the other seven are single-country funds. Three of these are in healthcare and one is a general equity, option-income fund. None has a distribution yield that approaches STK’s, and all but one sells at a premium. They have all turned in better TTM returns than STK, the two Tekla funds having done so by a large margin. Fund Distribution Yield TR 1yr Prem/Disc Columbia Seligman Premium Technology Growth Fund ( STK ) 11.15% 4.15% -0.72% Tekla Life Sciences Investors (NYSE: HQL ) 8.19% 35.08% 0.93% BlackRock Health Sciences Trust (NYSE: BME ) 5.36% 8.19% 4.64% Tekla Healthcare Investors (NYSE: HQH ) 8.30% 27.35% -0.32% Eaton Vance Tax-Managed Buy-Write Income Fund (NYSE: ETB ) 7.99% 7.80% 4.83% I should add here that HQL, HQH and ETB are long-time favorites of mine. If I were making recommendations in specialty equity CEFs, ETB or one or more of its sibling option-income funds from Eaton Vance would be at the top of that list. Right up there would be either HQL or HQH, which I consider must-own funds for the CEF investor. But for someone already invested in those funds and looking for opportunities for diversification in other sectors, STK is, in my view, among the strongest candidates. In conclusion, I think it’s clear that STK remains one of the most attractive options among high-income equity CEFs. Its 11.2% yield is near the top of the category. The income comes primarily from option premiums, which tends to position a fund somewhat more defensively in uncertain markets. Income is stable and, with the managed distribution policy, is likely to remain so, albeit with some risk of erosive return of capital in edgy times. On the negative side, while the fund has performed well over the past two years, its performance was erratic prior to 2013. It has also faltered since mid-2015 as its sector and the overall market started to turn sour. This may call into question the ability of management to handle less positive market environments. Disclosure: I am/we are long STK, HQH, HQL, ETB. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: I remind readers that this article does not constitute investment advice. I am passing along the results of my research on the subject. Any investor who finds these results intriguing will certainly want to do all due diligence to determine if any fund mentioned here is suitable for his or her portfolio. As always I welcome your comments and critiques, particularly from those readers who have contrary opinions.

PMR Vs. RTH: Using Your Discretion

Consumer Cyclicals and Consumer Non-Cyclicals may be invested in separate ETFs. An alternative is to choose a ‘blended’ Consumer Cyclicals and Non-Cyclical funds. Blended funds happen to be top performers in their asset class. Consumers drive the economy of the United States. Household spending accounts for, roughly, 70% of the US economy. Some of that spending is done of necessity: food, clothing, transportation, home heating and medical costs to name a few. These fundamental things of life which one must purchase, as time goes by, are classified as ‘ non-discretionary ‘ items. On the other hand, consumer capital which remains after the bills have been paid may be spent as one chooses: entertainment, travel and leisure, home improvements or durable goods. This is classified as ‘discretionary spending’. So important are the differences between discretionary and non-discretionary spending, investment fund managers carefully delineate the two into different sectors. Further, the non-discretionary sector is considered a ‘defensive’ sector since consumers must continue to spend for goods and services produced by those companies which in that sector; whereas discretionary spending is considered cyclically sensitive , that is to say that consumers will spend less on certain items when the economy slows and consumers are uncertain about jobs and incomes. The question the potential investor might ask, especially in the light of economic global uncertainty, is it prudent to invest in the consumer discretionary sector if the economy might contract a bit? The answer is quite general: it is extraordinarily difficult to pick market tops or bottoms. The best any individual investor might do is to accumulate shares through disciplined investing and dollar cost averaging over both good and bad times. If so, does it make sense to have both types in a portfolio? Fortunately, a third alternative is available. There are retail ETF investment products which offer a blend of both consumer cyclical and non-cyclical companies. Two of these are top performers: the Market Vectors Retail ETF (NYSEARCA: RTH ) and the PowerShares Dynamic Retail Portfolio ETF (NYSEARCA: PMR ) . (click to enlarge) According to Van Eck Global , RTH tracks their own Market Vectors US Listed Retail 25 Index (MVRTHTR) , “… a rules based index intended to track the overall performance of 25 of the largest US listed, publicly traded retail companies …” The fund consists of 25 US listed retailers. According to Invesco , PMR is based on the Dynamic Retail Intellidex Index filtering companies based on “… price momentum, earnings momentum, quality, management action, and value …” The fund consists of 30 US listed retailers. Although the funds come under the heading of ‘Consumer Discretionary’ (using the Seeking Alpha ETF Hub filter ) , they are actually a blend of both. The Market Vectors Retail fund blends 55.8% of Consumer Discretionary, with 34.2% of Consumer Staples and some Health Care 9.9%. The PowerShares Dynamic Retail Portfolio is a blend of 50.09% Consumer Discretionary, 41.95% Consumer Staples, 2.75% Industrials, 2.65% IT and 2.54% Materials. Hence both funds are similar in the number of holdings but differ in the underlying tracking indexes; both funds have comparatively few holdings yet perform rather well. The table below lists four of best performing funds in this sector. Fund Name Number of Holdings 1-Month 1-Year 3 Year Type Market Vectors Retail ETF (RTH) 26 -2.75% 21.63% 75.13% Blend of cyclical, non-cyclical and HealthCare Consumer Discretionary Select Sector SPDR ETF (NYSEARCA: XLY ) 88 -2.71% 14.13% 69.11% Consumer Discretionary PowerShares Dynamic Retail Portfolio ETF (PMR) 30 -3.64% 12.79% 55.46% Blend of cyclical, non-cyclical, IT, Industrials and Materials Vanguard Consumer Discretionary ETF (NYSEARCA: VCR ) 385 -2.94% 12.67% 68.92% Consumer Discretionary Data from Seeking Alpha ETF Hub Since RTH leads the similarly constructed PMR, it would be interesting to make a side-by-side comparison and perhaps determine what makes the difference. Surprisingly, the funds have few companies in common. With the exception of Home Depot (NYSE: HD ) at 8.57% of RTH vs 4.93% of PMR, the weighting of the other companies in common, are roughly the same. RTH with Weightings RTH with Weightings PMR with Weightings PMR with Weightings Costco (NASDAQ: COST ) 5.07% Ltd Brands (NYSE: LB ) 3.07% Costco 5.033% Ltd Brands 5.41% CVS Caremark (NYSE: CVS ) 6.90% Target (NYSE: TGT ) 4.35% CVS Caremark 4.78% Target 4.913% Home Depot 8.57% Walgreen (NASDAQ: WBA ) 5.69% Home Depot 4.93% Walgreen 5.041% Kroger (NYSE: KR ) 4.43% Whole Foods (NASDAQ: WFM ) 1.47% Kroger 5.274% Whole Foods 2.71% Data from Van Eck and Invesco Next, since the top ten heaviest weighted companies affect the overall performance of a fund, the funds ten heaviest weightings should be compared. The bar charts below, demonstrates that PMR’s top ten heaviest weighted holdings are pretty much evenly distributed, and slightly biased towards Consumer Staples at about 56.253% of those top ten. It should also be noted that about 46.54% of the fund’s total holdings are concentrated in the top ten. Data from Invesco The next table demonstrates that RTH’s top ten heaviest weighted holdings are not as evenly distributed as PMR and has a Consumer Discretionary bias at 54.85% of the top ten. Further a large portion of that is concentrated in the top two holdings Amazon (NASDAQ: AMZN ) and Home Depot , accounting for 33.06% of the top ten and almost 22% of the funds entire holdings. Lastly, 65.63% of RTH’s total holdings are concentrated in those top ten holdings. Data from Van Eck Hence, it seems that RTH has a slightly more bias towards Consumer Cyclicals than PMR and is skewed towards its heaviest weighted holdings (as of September 18), and then towards two of those top ten. On the other hand, PMR has a more even distribution of its top ten holdings and those top ten holdings account for less than half of the portfolio’s total holdings. Lastly, a few ETF technical items need to be compared. Fund and Inception Date 30 day SEC Yield Shares Outstanding Net Assets Net Expense Ratio Price/ Earnings 3 year Beta Open Option Interest RTH 12/20/2011 1.19% (annual Distributions) 2,671,531 $204.2 million 0.35% capped until 2/1/2016 20.00 0.88 Yes PMR 10/26/2005 0.70% 650,000 $25.103 million 0.63% 20.83 0.89 Yes Data from Invesco and VanEck The entire point of the matter is this: for a disciplined investor with limited funds, building a well-diversified concise portfolio of ETFs with the long term in mind, there’s no need to allocate towards Consumer Cyclicals and Non-Cyclicals separately. Instead, by selecting one of the available funds with a blend of Consumer Cyclicals and Non-Cyclical, will result in a far more efficient way to invest, and by needing to allocate into one blended fund instead of two separate funds will save on management fees and commissions over the long term. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: CFDs, spreadbetting and FX can result in losses exceeding your initial deposit. They are not suitable for everyone, so please ensure you understand the risks. Seek independent financial advice if necessary. Nothing in this article should be considered a personal recommendation. It does not account for your personal circumstances or appetite for risk.

Goldman Sachs Enters The ETF Fray In A Compelling Way

Summary Goldman Sachs recently announced their entry into the ETF marketplace with 6 ActiveBeta ETFs. One in particular caught my eye. Investors have historically faced the choice of going with completely passive (i.e. index) ETFs to obtain low costs, or active ETFs with much higher costs. In this article, I dive into an offering that may bridge the gap. As announced earlier today on Seeking Alpha as well as several other news sources, Goldman Sachs’ (NYSE: GS ) first foray into the ETF marketplace is open for business. The ActiveBeta U.S. Large Cap Equity ETF (NYSEARCA: GSLC ) is the first of six ETFs Goldman will be launching. Of the group, this is also the one in particular that caught my eye. Why? For this simple reason. Goldman previously announced that this ETF will be sporting an incredibly low .09% expense ratio. That’s right. An ETF which certainly contains components of active management in the sense of using factor investing tools and techniques in an attempt to provide market-beating returns, while doing so at an expense ratio that is competitive with the very lowest cost index ETFs. My curiosity was sufficiently piqued to spend a little time digging into this ETF, in an attempt to understand what an investor who decides to invest would be getting. Composition and Analysis It didn’t take too much digging to find the prospectus . Here are some tidbits you may find interesting. First of all, the fund tracks a proprietary index known as the Goldman Sachs ActiveBeta® U.S. Large Cap Equity Index. With a little more digging, I was able to find supporting documentation with respect to this index. Here is the index itself and here is the methodology used in its construction. One can quickly see that the index tracks a large number of securities, 455 to be precise. Once the base securities are selected, a proprietary “factor score” is assigned to each, based on the following factors: Value – A composite of various valuation measures. Momentum – Beta and volatility-adjusted total returns. Quality – Various measures of profitability divided by assets. Low Volatility – The inverse of standard deviation Based on this analysis, each security will be assigned some weight in the final index, ranging from overweight down to as low as zero (the prospectus clarifies that the fund will not short securities, so zero is the lowest possible weighting). In addition to this, the fund attempts to reduce the costs and tax implications associated with excessive turnover by employing proprietary tools to attempt to identify offsetting pair trades, as well as allowing each security to “float” a defined distance away from its prescribed target weight. I interpret that as a mathematical formula which identifies that the cost of trading exceeds the risk from the slight imbalance. The index is rebalanced quarterly; in February, May, August and November. Finally, using the index reference linked above, I was able to determine the top holdings as of the latest rebalancing. To help you dig just a little deeper, I hereby present, not just the Top 10, but the Top 20 holdings: As can be seen, these cross a wide variety of sectors; including technology, health care, financial, energy, and telecommunications. Summary and Conclusion I am impressed with Goldman Sachs’ offering. About the closest thing in my portfolio that I can compare it to is the Vanguard Dividend Appreciation ETF (NYSEARCA: VIG ), which I have written about previously right here on Seeking Alpha. Some high-level similarities include the fact that both use a proprietary index to screen for desired criteria, rebalance the indexes on a regular basis to eliminate securities that no longer meet the criteria, and sport rock-bottom expense ratios (.10% in the case of VIG). I haven’t made any final decisions yet. I tend to move slowly and carefully. However, I would not at all be surprised if the Goldman Sachs ActiveBeta U.S. Large Cap Equity ETF ends up occupying a place in my portfolio. Disclosure: I am/we are long VIG. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: I am not a registered investment advisor or broker/dealer. Readers are advised that the material contained herein should be used solely for informational purposes, and to consult with their personal tax or financial advisors as to its applicability to their circumstances. Investing involves risk, including the loss of principal.