Tag Archives: income

Junk Bond CEFs Yielding 9% And Poised To Benefit From Rising Interest Rates (Part 1)

Summary In the high yield bond carnage, there is a group of funds that has gone oversold despite their insulation from rising interest rates. These funds do not borrow money to invest, so rising interest rates will not negatively impact their net investment income (NII). There remains risk to these funds’ NAV from further declines in the bond market, but dividends are safe for all but one fund. Junk bond markets have gone through a panic and are now in a lull, although many expect more turbulence with future interest rate hikes hurting both the value of issued debts and the borrowing costs of levered closed-end funds. There is a small group of non-levered CEFs that invest in junk bonds but do not use leverage, thereby insulating themselves from higher borrowing costs that will narrow spreads and impact their net investment income in much the way that earnings are hindered by mREITs and BDCs who depend on a spread between low borrowing costs and high investment income from debts. (click to enlarge) Source: Google Finance, SEC Edgar Instead, these funds focus on the high yield market and pass on net investment income to shareholders without borrowing to boost returns. Despite that, these funds’ distribution yields are familiar to investors of levered CEFs, ranging from 4.5% to 12.28%. These funds are: the MFS Special Value Trust (NYSE: MFV ), the Putnam High Income Securities Fund (NYSE: PCF ), the Western Asset High Income Opportunity Fund (NYSE: HIO ), the Western Asset High Yield Fund (NYSE: HYI ), and the Western Asset Managed High Income Fund (NYSE: MHY ). Despite their lower risk profile, these funds have suffered declines similar to levered CEFs, with double-digit declines in the past year across the board, and most losses incurred in the last six months: (click to enlarge) Source: Google Finance With the exception of MFV, these funds were relatively strong performers and were outperforming many levered CEFs thanks to their lower risk profile until the summer. Then as yields rose sharply for high yield debt and default rates continued to rise, these funds joined the junk sell-off to reach their 52-week lows. Source: Moody’s The increase in yields is in part a result of higher defaults and credit downgrades across the market, and has also caused NAVs for these funds to fall alongside all other junk bond funds. This dynamic means that these funds’ current discount to NAV is in fact close to its highest discount in the last year, despite being near 52-week lows: (click to enlarge) Source: CEFA’s Universe Data Is the Risk There? There remains a risk that, if yields rise and bond values fall, the NAV of these funds will decline. However, there is not a commensurate risk of NII declines for two reasons. Firstly, higher borrowing costs are a non-issue for these funds. For funds that are 40% levered or more, higher borrowing costs could damage their ability to make a profit from borrowing to buy junk bonds. What’s more, funds that will need to de-lever because of fears of declining NAVs will be forced to sell off when values are plummeting, causing a similar dynamic that resulted in the shuttering of bond funds like Third Avenue’s . This is a non-issue for these non-levered CEFs. Without borrowing costs or redemptions an issue, they do not need to sell issues unless their NII-to-distribution coverage falls below 100%, which is currently not the case in any of these funds except for MFV. (I will discuss NII coverage of these funds in a future article). With the exception of MFV, this is a rare group of funds which investors can purchase without fears of declining NAVs resulting in distribution cuts. With a sustainable yield of around 9%, these funds are worth considering as an option for immediate and reliable income. Avoid MFV The only fund of this group that is under-earning its distributions is MFV. This is in part due to a recent change in its investment strategy that allows it to focus more on equities in addition to debt: The fund currently has an investment policy that MFS normally will invest the fund’s assets primarily in debt instruments. Effective on December 9, 2015, that policy will be changed to provide that MFS normally invests a majority of the fund’s assets in debt instruments. The change allows the portfolio management team greater flexibility to increase the fund’s exposure to equity securities. There are no other changes to the way the fund is being managed. The good news about this shift is that it will allow the fund to avoid the turbulence of the high yield market with greater flexibility to diversify into equities. The bad news is that this will negatively impact the fund’s immediate income and make it more dependent on capital gains-and active trading-to maintain payouts. Currently, the fund has devoted a third of its assets into equities, limiting its income producing opportunity: (click to enlarge) At the same time, the fund’s equity allocations are slightly skewed towards financial services companies; an ironic decision, considering these companies will benefit the most from rising interest rates: (click to enlarge) It is unclear why the fund’s management has decided on this shift and chosen what very may well be near the bottom of the junk bond market to do so; a decision to shift towards equities earlier in 2015 would have demonstrated much more foresight. So Which to Choose? In part 2 of this series I will discuss the credit quality and income durability of the other funds, but suffice to say for now each currently has NII in excess of its distributions, with coverage ranging from 107% to 128%: (click to enlarge) The relatively low yield on PCF, combined with its high distribution coverage, means that it is unlikely to cut dividends in the short term as it did in 2012, 2013, and 2014, but it also makes the fund’s income stream relatively low compared to HIO HYI, and MHY. In the cases of these funds, distribution coverage is currently solid, making any of these a worthwhile addition to a diversified high yield income portfolio.

BDCL Attractive With 21.5% Yield And Deep Component Discounts To Book Value

Summary BDCL’s quarterly dividend paid in January 2016 is projected to be $0.8216, an increase from October 2015 . On an annualized quarterly compounded basis the yield is 21.5%. While there are problems and high fees associated with some of the business development companies, the discounts to book value and high yields make BDCL attractive. The ETRACS 2xLeveraged Long Wells Fargo Business Development Company ETN (NYSEARCA: BDCL ) will soon be declaring its dividend for the quarter ending December 31, 2015. The dividend will be paid in January 2016. BDCL is an exchanged-traded note that employs 2X leverage to generate exceptionally high yields. Most of the 44 Business Development Companies that comprise the index portfolio upon which BDCL is based have announced dividends with ex-dates in the fourth quarter of 2015. American Capital Ltd. (NASDAQ: ACAS ) and Harris & Harris Group Inc. (NASDAQ: TINY ) do not pay dividends. Capital Southwest Corp. (NASDAQ: CSWC ) pays semiannually and did have an ex-date in the second quarter of 2015 but has declared one since, so I did not include it in the dividend calculation. Main Street Capital Corp (NYSE: MAIN ) pays $0.18 monthly and had a $0.275 special dividend in the fourth quarter of 2015 that is included in the dividend calculation. From 41 of the 44 Business Development Companies who pay dividends with ex-dates in the fourth quarter of 2015, I projected that BDCL’s quarterly dividend paid in January 2016 will be $0.8216. This is an increase of 5.6% from the quarterly $0.7782 dividend paid in September 2015. Most of the increase is due to the increase in the indicative or net asset value of BDCL from $15.6699 on September 30, 2015 to the current $16.5565. The dividend of a leveraged ETN is impacted by the rebalancing of the portfolio each month to bring the amount of leverage back to 2X. If the value of the portfolio declines, portfolio assets must be reduced to maintain the leverage level. This reduces the dividend, is in addition to any reductions from dividend cuts by any of the components in the portfolio. Conversely, if the prices of the component securities increases, the dividend paid by the ETN will increase even if the components of the ETN do not change their dividends. That was the case in the fourth quarter of 2015. The relationship between the net asset value of MORL and the dividend is explained more fully in: MORL’s Net Asset Value Rises – Implications For The Dividends. The table below shows the weight of each of the components of the index upon which BDCL is based. The prices are as of December 23, 2015. The weights are the latest on the BDCL website. The table also shows the dividend rate, the ex-dates, and the contribution by component of the components that pay dividends. In the frequency column “q” denotes quarterly, those that pay monthly have an “m”, and the semi-annual payers are denoted by “s”. Interestingly, the second-largest component of the index upon which BDCL is based, American Capital Ltd., with a weight of 11.51%, is one the 2 components that do not currently pay any dividends. The other component that does not currently pay dividends is TINY has a weight of 0.27%. Thus, 11.78% by weight of the components of BDCL do not pay any dividends now. If CSWC, with a weight of 2.3%, which has not declared a semi-annual dividend after last doing so on 04/24/2015, is included as a non-payer, then 14.08% by weight of the components of BDCL do not pay any dividends now Some readers have asked to see the details of my dividend calculations. I have changed my procedure, and now use the contribution by component method. It should give the exact same result as my previous method that could be called the total imputed dividends divided by the number of shares outstanding method. An example of that methodology using actual numbers can be seen in the article ” MORL Yielding 24.7% Based On Projected June Dividend “. In the total imputed dividends divided by the number of shares outstanding methodology, the number of shares outstanding appears both as a numerator and a denominator. Thus, the same result can be obtained by using the contribution by component method. This method involves multiplying the net asset value of BDCL by weight of each component with an ex-date during the month prior to the month in question, and then multiplying that product by 2 to account for the 2X leverage. That product is then divided by the share price of the component. This is an imputed value for how many shares of the component each share of BDCL represents. Multiplying the shares of the component per BDCL share times the dividend declared by the component gives the contribution by component for each component. Adding all of the contributions of all of the components with an ex-date in the month prior to the month for which the dividend is being computed and adjusting for expenses, gives a projection for the dividend. The index upon which BDCL is based is a float-adjusted, capitalization-weighted index that includes the Business Development Companies listed on the major exchanges. The fact that 14.08% of the companies that comprise BDCL are not currently paying dividends can be looked at with either a “glass is half full” or “glass half empty” perspective. On the bright side, there could be considerable room for an increase in the dividends paid by BDCL if those components not presently paying dividends were to resume them. On the other hand, the fact that 14.08% of the companies that comprise BDCL are not currently paying dividends could be seen as a warning that other components in the portfolio might also suspend dividends at some point in the future. The premise for using 2x leveraged ETNs such BDCL to generate high income is that the extra income resulting from the spread between the dividends paid by the components of index upon which the ETN is based and the interest effectively paid by the ETN on the leveraged portion, should offset any declines in price by the business development companies in the index upon which BEDCL is based. With BDCL the weighted average of the dividends paid by the business development companies that comprise the portfolio is about 10% on a non-compounded basis. With 2x leverage the dividend yield on BDCL, before compounding is the 10% paid by the portfolio plus the amount generated by the leverage spread which is currently 10% less the financing expense based on three-month LIBOR, now 0.6%. Thus, before compounding, the dividend yield will be approximately 10% + 19.6% = 19.6%. While the dividend yield on BDCL has been consistently above 20%, the prices of the business development companies that comprise the index upon which BDCL is based have declined so much that for some holding periods the total return on BDCL has actually been negative. This has exacerbated with the recent general aversion to most high-yielding securities whether they be junk bonds, mREITS or high-dividend closed-end funds. With BDCL, concerns over high fees and problems with specific business development companies in the index and that sector in general have caused BDCL to underperform the equity markets in recent months. This has led many of them to trade at large discounts to book value. Computing the book value for business development companies can be problematic since many of their assets are not publicly traded. However, the higher yielding business development companies that compose the index upon which BDCL is based are generally thought be at historically large discounts to book value. This, could allow the slide in the market prices of the business development companies to reverse at some point. The relatively high yield and high beta or systematic risk is consistent with the Capital Asset Pricing Model. One wrinkle is that for investors seeking higher yields, BDCL may actually be a relatively efficient diversifier, if those investors are now heavily invested in higher-yielding instruments that are very interest rate-sensitive. Previously, I pointed out in the article ” 17.8%-Yielding CEFL – Diversification On Top Of Diversification, Or Fees On Top Of Fees? ” that those investors who have significant portions of their portfolios in mREITs, and in particular, a leveraged basket of mREITs such as the UBS ETRACS Monthly Pay 2xLeveraged Mortgage REIT ETN (NYSEARCA: MORL ), could benefit from diversifying into an instrument that was highly correlated to SPY. The UBS ETRACS Monthly Pay 2xLeveraged Closed-End Fund ETN (NYSEARCA: CEFL ) is highly correlated to SPY, while only 5% of the variation in daily returns for MORL can be explained by the daily variation in the S&P index. Since CEFL yields almost as much as MORL, this suggests that a portfolio consisting of both MORL and CEFL would have almost as much yield as a portfolio with only MORL, but considerably less risk. Adding BDCL to such as portfolio could result in a more efficient risk/return profile. There is an unlevered fund that uses the same index as BDCL — the UBS ETRACS Wells Fargo Business Development Company ETN (NYSEARCA: BDCS ). BDCS could also be a good investment for those who want higher yields and want to use their own leverage to do so. Buying BDCS on a 50% margin would return a higher, or at least comparable, yield to buying BDCL for those who could borrow at LIBOR or some similar level. Many retail investors cannot borrow at interest rates low enough to make buying BDCS on margin a better proposition than buying BDCL. However, larger investors with access to low margin rates might do better by buying BDCS on margin. Even some small investors could do better buying BDCS rather than BDCL, in some cases. For example, an investor might have $10,000 in a brokerage account in a money market fund and want to get at least some return by investing a small part of the $10,000 in BDCL or BDCS. Most brokerage firms pay just 0.01% on money market funds. The annual return on $10,000, at 0.01%, is $1 per year. If this hypothetical investor were thinking of either investing $1,000 of his $10,000 in BDCL and keeping $9,000 in the money market fund, or investing $2,000 of his $10,000 in BDCS and keeping $8,000 in the money market fund, either choice would entail the same amount of risk and potential capital gain. This is because BDCL, being 2X leveraged, would be expected to move either way twice as much as a basket of Business Development Companies, while BDCS would move in line with a basket of Business Development Companies. For this hypothetical investor, his effective borrowing cost is the rate on the money market fund. Thus, his income from the $2,000 of his $10,000 in BDCS and $8,000 in the money market fund should exceed that of $1,000 of his $10,000 invested in BDCL and $9,000 in the money market fund, since his effective borrowing rate on the extra $1,000 invested in BDCS is less than what the imputed borrowing cost that BDCL uses. As I indicated in the article ” BDCL: The Third Leg Of The High-Yielding Leveraged ETN Stool, ” the 44 Business Development Companies that comprise the index upon which BDCL is based are a varied lot. Medallion Financial finances taxi cab companies. ACAS manages $20 billion worth of assets, including American Capital Agency Corp. (NASDAQ: AGNC ) and American Capital Mortgage Investment (NASDAQ: MTGE ), which are mREITs that are included in MORL. Each of the 44 Business Development Companies that comprise the index upon which BDCL is based have their own specific risk factors. The power of diversification can make a portfolio now comprised mainly of high-yielding interest rate-sensitive instruments more efficient when BDCL is added to that portfolio. As I explained in the article ” 30% Yielding MORL, MORT And The mREITs: A Real World Application And Test Of Modern Portfolio Theory ,” a security or a portfolio of securities is more efficient than another asset if it has a higher expected return than the other asset but no more risk, or has the same expected return but less risk. Portfolios of assets will generally be more efficient than individual assets. Compare investing all of your money in one security that had an expected return of 10% with some level of risk to a portfolio comprised of 20 securities each with an expected return of 10% with the same level of risk as the single security. The portfolio would provide the exact same expected return of 10%, but with less risk than the individual security. Thus, the portfolio is more efficient than any of the individual assets in the portfolio. My projection of $0.8216 for the BDCL January 2016 dividend would be an annual rate of $3.29 This would be a 19.9% simple yield, with BDCL priced at $16.5 and an annualized quarterly compounded yield of 21.5%. If someone thought that over the next five years market and credit conditions would remain relatively stable, and thus, BDCL would continue to yield 21.5% on a compounded basis, the return on a strategy of reinvesting all dividends would be enormous. An investment of $100,000 would be worth $264,290 in five years. More interestingly, for those investing for future income, the income from the initial $100,000 would increase from the $20,800 first-year annual rate to $56,822 annually. BDCL prices and dividends as of December 23, 2015 name ticker weight(%) price ex-date dividend freq contribution American Capital Ltd ACAS 11.51 14.19 Ares Capital Corp ARCC 9.97 14.63 12/11/2015 0.38 q 0.0857 Prospect Capital Corp PSEC 9.2 7.22 1/27/2016 0.08333 m 0.1055 Fs Investment Corp FSIC 8.61 9.21 12/18/2015 0.22275 q 0.0690 Main Street Capital Corp MAIN 5.5 30.2 2/18/2016 0.18 m 0.0491 Apollo Investment Corp AINV 4.86 5.41 12/17/2015 0.2 q 0.0595 Fifth Street Finance Corp FSC 3.58 6.29 2/10/2016 0.06 m 0.0339 Golub Capital BDC Inc GBDC 3.29 16.88 12/9/2015 0.32 q 0.0207 TPG Specialty Lending Inc TSLX 3.25 16.86 12/29/2015 0.39 q 0.0249 Hercules Technology Growth Capital Inc HTGC 3.24 12.38 11/12/2015 0.31 q 0.0269 BlackRock Kelso Capital Corp BKCC 2.67 9.53 12/22/2015 0.21 q 0.0195 TCP Capital Corp TCPC 2.66 14.34 12/15/2015 0.36 q 0.0221 Solar Capital Ltd SLRC 2.64 16.82 12/15/2015 0.4 q 0.0208 New Mountain Finance Corp NMFC 2.57 12.9 12/14/2015 0.34 q 0.0224 Goldman Sachs Bdc Closed End Fund GSBD 2.42 19.85 12/29/2015 0.45 q 0.0182 Triangle Capital Corp TCAP 2.35 19.52 12/7/2015 0.59 q 0.0235 Capital Southwest Corp CSWC 2.3 14.29 5/12/2015 s 0.0000 PennantPark Investment Corp PNNT 1.81 6.45 12/22/2015 0.28 q 0.0260 Medley Capital Corp MCC 1.73 7.84 11/23/2015 0.3 q 0.0219 THL Credit Inc TCRD 1.37 11.2 12/11/2015 0.34 q 0.0138 TICC Capital Corp TICC 1.36 6.1 12/14/2015 0.29 q 0.0214 PennantPark Floating Rate Capital Ltd PFLT 1.15 11.44 12/22/2015 0.095 m 0.0095 Fidus Investment Corp FDUS 0.89 14.38 12/2/2015 0.43 q 0.0088 Gladstone Investment Corp GAIN 0.89 7.9 12/16/2015 0.0625 m 0.0070 Fifth Street Senior Floating Rate Corp FSFR 0.87 8.52 2/3/2016 0.075 m 0.0076 Triplepoint Venture Growth BDC Corp TPVG 0.8 12.12 11/25/2015 0.36 q 0.0079 Garrison Capital Inc. GARS 0.78 12.66 12/9/2015 0.35 q 0.0071 Capitala Finance Corp CPTA 0.69 12.21 12/22/2015 0.2067 m 0.0116 Monroe Capital Corp MRCC 0.61 12.94 12/11/2015 0.35 q 0.0055 Newtek Business Services Corp NEWT 0.61 13.52 11/16/2015 3.19 q 0.0477 MVC Capital Inc MVC 0.58 7.58 12/29/2015 0.305 q 0.0077 Gladstone Capital Corp GLAD 0.55 7.3 12/16/2015 0.07 m 0.0052 KCAP Financial Inc KCAP 0.52 4.27 10/9/2015 0.21 q 0.0085 Solar Senior Capital Ltd SUNS 0.51 15.01 12/15/2015 0.1175 m 0.0040 Medallion Financial Corp TAXI 0.49 7.1 11/10/2015 0.25 q 0.0057 Horizon Technology Finance Corp HRZN 0.48 11.72 12/16/2015 0.115 m 0.0047 Stellus Capital Investment Corp SCM 0.47 10.14 12/29/2015 0.1133 m 0.0052 Alcentra Capital Corp ABDC 0.41 12.17 12/29/2015 0.34 q 0.0038 American Capital Senior Floating Closed Fund ACSF 0.4 9.96 1/20/2016 0.097 m 0.0039 CM Finance Inc CMFN 0.3 10.55 12/16/2015 0.3469 q 0.0033 WhiteHorse Finance Inc WHF 0.29 11.48 12/17/2015 0.355 q 0.0030 Oha Investment Corp OHAI 0.28 3.99 12/29/2015 0.12 q 0.0028 OFS Capital Corp OFS 0.28 10.87 12/15/2015 0.34 q 0.0029 Harris & Harris Group Inc TINY 0.27 2.21 0 0.0000

CEFL: A Year In Review, And A Prediction Of What’s Ahead

Summary 2015 has not been a good year for CEFL unitholders: income declined by 20% while price declined by 33%. This article presents a review of CEFL happenings in 2015, and a forecast of what’s ahead for 2016. Based on the publicly available index methodology, the CEFs to be added or removed are predicted. Introduction The ETRACS Monthly Pay 2xLeveraged Closed-End Fund ETN (NYSEARCA: CEFL ) is a 2x leveraged exchange-traded note [ETN] that tracks twice the monthly performance of the ISE High Income Index [symbol YLDA]. The YieldShares High Income ETF (NYSEARCA: YYY ) tracks the same index, but is unleveraged. CEFL is a popular investment vehicle among retail investors due to its high income (24.52% trailing twelve months yield), which is paid monthly. With 2015 nearly behind us, I thought I would review the characteristics of this year’s iteration of CEFL, and also look ahead at what might be in store for us in 2016. (Source: Main Street Investor ) 2015 portfolio YLDA holds 30 closed-end funds [CEFs], and is rebalanced annually. As I have previously discussed in my three-part “X-raying CEFL” series, this year’s iteration of CEFL (and thus also YYY) had the following characteristics: CEFL is comprised of approximately one-third equity and two-thirds debt, is effectively leveraged by 240% and has a total expense ratio of 4.92% per dollar invested in the fund (or 2.05% per dollar of assets controlled) (discussed in ” X-Raying CEFL: Leverage And Expense Ratio Statistics “). CEFL contained around two-thirds of North American (primarily U.S.) assets, with the rest being international. Moreover, the North American component of CEFL contains a higher allocation to debt vs. equity than the European component of CEFL (discussed in ” X-Raying CEFL (Part 2): Geographical Distribution “). CEFL is not very interest-rate sensitive as most of the holdings of CEFL are most-correlated with high-yield debt (discussed in ” X-Raying CEFL (Part 3): Interest Rate Sensitivity “). Actually, I might have been inaccurate in my last prediction. Over the last year, the price action of CEFL has actually moved in the same direction to interest rates, which is exactly opposite to what would be expected for a traditional bond fund. But this is not entirely surprising for CEFL, because high-yield debt usually tend to trade in tandem with equities and in the opposite direction to treasuries. Indeed, CEFL had a positive +0.71 correlation with U.S. equities (via SPDR S&P 500 ETF (NYSEARCA: SPY ) over the past year, but a negative -0.24 correlation with treasuries (via the iShares 20+ Year Treasury Bond ETF) (NYSEARCA: TLT ) (source: InvestSpy ). Thus, readers who worried that higher interest rates would lower the price of CEFL may actually have been pleasantly surprised that the opposite has held true this year. Decreasing yield Seeking Alpha author Professor Lance Brofman has done a wonderful job predicting the upcoming distributions for CEFL (see his latest article here ), while also providing expert commentary in his area of expertise. The distribution history for CEFL, which now has paid out 24 months of dividends, is presented below. Unfortunately, we see that the distributions paid out by CEFL have been in decline. In 2014, each share of CEFL paid out $4.74 of distributions, but in 2015, each share of CEFL only paid out $3.82 of distributions. This means that the distribution of CEFL has declined by 19.5% year on year. I believe that a large reason for the distribution decline can be attributed to the rebalancing debacle that occurred at the turn of this year (see below). CEFL has a current trailing twelve months yield of 24.52%. Rebalancing debacle The annual rebalancing in the index YLDA was disastrous for CEFL and YYY holders. The reasons for this have been summarized in my recent article ” Are You Ready For CEFL’s Year-End Rebalancing ?” In short, up to 10% of the net asset value of CEFL may have been lost due to traders (including, perhaps, UBS themselves) buying and selling the CEFs to be added or removed from the index ahead of the actual rebalancing date (a form of “front-running,” see this Bloomberg article for more information on this phenomenon). For further study on the rebalancing issue, consult my previous articles on this issue in the below links: Predicting the 2016 portfolio How might the portfolio of CEFL change upon the next rebalancing event, which is scheduled to occur in the next few days? As discussed in my most recent CEFL article, the index provider has decided that upcoming index will not be announced 5 days in advance. This was intended to prevent “front-running” of the index. However, with the index methodology published and available to all, I had little doubt that professional investors would be able to use the selection rules to determine which stocks would be added or removed from the index. Therefore, in an attempt to level the playing field for everyone else, I have tried to approximate the index methodology in order to predict CEFL’s portfolio for 2016. The selection methodology for the index is reproduced below (source: ISE ). 1. Restrict selection universe to closed-end funds with market cap > $500M and six month daily average volume > $1M. 2. Rank each fund by the following three criteria: i. Fund yield (descending) ii. Fund share price Premium / Discount to Net Asset Value (ascending) iii. Fund Average Daily Value (ADV) of shares traded (descending) 3. Calculate an overall rank for each fund by taking the weighted average of the three ranks with the following weightings: yield: 50%, premium/discount: 25%, average daily value: 25%. 4. Select the 30 funds with the highest overall rank. Using CEFAnalyzer , I obtained a list of the 141 CEFs with market cap > $500M. Unfortunately, I was unable to apply a volume filter because I was not sure what specific time period CEFAnalyzer reports volume data for. I then replicated the index methodology for the 141 CEFs on this list. The below table shows the top 30 CEFs for either distribution yield or discount among the CEFs with market cap > $500M. Rank Ticker Yield Rank Ticker Discount 1 GGN 17.14% 1 BCX -16.92% 2 PHK 14.58% 2 AOD -16.88% 3 KYN 14.44% 3 AWP -16.29% 4 NHF 14.23% 4 IGR -16.19% 5 HIX 13.06% 5 FAX -16.09% 6 TDF 13.03% 6 RNP -15.64% 7 IGD 12.67% 7 GLO -15.33% 8 RVT 12.40% 8 RVT -15.07% 9 CEM 11.73% 9 NFJ -15.04% 10 PTY 11.69% 10 DPG -15.04% 11 GLO 11.37% 11 UTF -14.93% 12 GAB 11.21% 12 ADX -14.92% 13 EXG 11.17% 13 TY -14.81% 14 BCX 11.12% 14 WIW -14.79% 15 CHI 11.11% 15 TDF -14.63% 16 ETJ 11.05% 16 NXJ -14.58% 17 EAD 10.94% 17 NHF -14.57% 18 DSL 10.89% 18 NIE -13.63% 19 CHY 10.89% 19 NQP -13.40% 20 PFN 10.75% 20 USA -13.32% 21 PCI 10.74% 21 FSD -13.31% 22 FEI 10.44% 22 BIT -13.04% 23 ETW 10.36% 23 GDV -12.81% 24 AWP 10.24% 24 JQC -12.70% 25 NTG 9.95% 25 CAF -12.50% 26 PCN 9.86% 26 IGD -12.41% 27 CSQ 9.81% 27 VTA -12.33% 28 PDI 9.62% 28 RQI -12.27% 29 NFJ 9.62% 29 BDJ -12.10% 30 EVV 9.59% 30 NQU -12.04% The yield ranking was then weighted by 50% while the discount ranking was weighted by 25% (the rankings are assigned to all 141 CEFs, and not only to the top 30). The ranking for volume is not shown above because I was not sure about the time period used by CEFAnalyzer to calculate volume, as alluded to earlier. However, because I did not have time to manually calculate the ADV for 141 CEFs, the CEFAnalyzer data was still used to obtain a volume ranking for the funds, which was weighted by 25%. The weighted rankings were then summed, and the top 30 CEFs with the highest overall ranking are shown below, along with their composite individual ranks. A quick check on Yahoo Finance indicated that the 3-month ADV of these 30 CEFs was above the $1M cut-off (which is actually for the 6-month ADV, but I did not calculate this). Rank Ticker Yield Discount Volume Overall 1 (NYSE: RVT ) 8 8 18 10.50 2 (NYSE: BCX ) 14 1 25 13.50 3 (NYSEMKT: GGN ) 1 42 16 15.00 4 (NYSEMKT: GLO ) 11 7 39 17.00 5 (NYSE: NFJ ) 29 9 15 20.50 6 (NYSE: IGD ) 7 26 48 22.00 7 (NYSE: EXG ) 13 50 13 22.25 8 (NYSE: PCI ) 21 39 11 23.00 9 (NYSE: HIX ) 5 79 12 25.25 10 (NYSEMKT: EVV ) 30 35 17 28.00 11 (NYSE: DPG ) 33 10 38 28.50 12 (NYSE: AOD ) 44 2 24 28.50 13 (NYSE: NHF ) 4 17 96 30.25 14 (NYSE: DSL ) 18 77 8 30.25 15 (NYSE: CEM ) 9 100 5 30.75 16 (NASDAQ: CSQ ) 27 52 19 31.25 17 (NYSE: KYN ) 3 119 2 31.75 18 (NASDAQ: CHI ) 15 96 1 31.75 19 (NYSE: TDF ) 6 15 104 32.75 20 (NYSE: AWP ) 24 3 83 33.50 21 (NYSE: USA ) 31 20 58 35.00 22 (NYSE: BGB ) 36 46 26 36.00 23 (NYSE: NTG ) 25 88 6 36.00 24 (NYSE: FEI ) 22 97 7 37.00 25 (NYSE: BIT ) 47 22 32 37.00 26 (NYSE: UTF ) 54 11 29 37.00 27 (NYSE: BOE ) 40 41 30 37.75 28 (NYSE: GHY ) 39 47 27 38.00 29 (NYSE: ETJ ) 16 56 71 39.75 30 (NYSEMKT: FAX ) 41 5 72 39.75 At this point, I would like to compare notes with reader waldschm85 : I’ve attempted to follow the index methodology and came up with the below holdings from largest to smallest as of the open. How does this compare to your list Stanford Chemist?: BCX, TDF, GGN, RVT, KYN, PCI, NFJ, NTG, IGD, NHF, EXG, CSQ, GLO, DPG, CEM, , FEI, CHY, DSL, CHI, USA, HIX, PHK, GAB, TYG, EAD, ETJ, PTY, ETW, PFN, PCN Comparison of our two lists show that we have 20 out of 30 CEFs in common, which is quite high considering that [i] we did our analyses every days apart and [ii] I used an unspecified volume figure for ADV ranking while waldschm85 may have used a more accurate method. While the weighting methodology is too complex to be reproduced here, it can be noted that last year’s rebalance produced the CEF distribution shown below. The methodology states that no CEF can comprise more than 4.25% of the index. Additionally, the top 15 largest CEFs after last year’s rebalance all had weights of above 4%. I expect the weighting distribution of the 30 CEFs after this year’s rebalance to be quite similar to the last. Additions and deletions (predicted) Here we get to the interesting part! Which funds are completely new, and which will be completely removed? Which CEFs are in both 2015 and 2016 (predicted) portfolios? The following will be performed with my list of top 30 CEFs – obviously results will differ using waldschm85’s list or that of another person’s. CEFs are presented in alphabetical order. Added CEFs: BCX, BOE, CEM, CHI, CSQ, DPG, ETJ, FEI, IGD, KYN, NFJ, NHF, NTG, PCI, RVT, TDF, USA, UTF Removed CEFs: BGY, CHW, EAD, EDD, ERC, ESD, ETY, FPF, HYT, IGD, ISD, JPC, MRC, MMT, NCV, NCZ, PCI CEFs that remain from last year: AOD, AWP, BGB, BIT, DSL, EVV, EXG, FAX, GGN, GHY, GLO, HIX. The information above shows that 18 CEFs will be added to the index and 18 will be removed. 12 CEFs will remain in the index. This is a relatively high turnover but it is not unexpected given the fact that both the distributions and premium/discount values of CEFs can vary wildly. Moreover, given that I did not calculate weightings for the 2016 portfolio, I was unable to predict which CEFs will undergo the highest increases or decreases in allocation. However, it should be stressed that the above lists are only approximate. This is because I only performed a crude replication of the index methodology (specifically, I did not use the six-month ADV for either screening or ranking), and also because of the fact that the actual selection and ranking algorithm will be performed on CEF data at year-end rather than from today. Therefore, I am hesitant to recommend the buying of the CEFs to be added and the selling of CEFs to be removed as a potential strategy to profit from the upcoming rebalance. Use the information above at your own risk. Summary 2015 has not been a good year for CEFL unitholders. First, the botched rebalancing mechanism cause permanent loss of value in the index. Second, CEFL holders received 19.5% less income in 2015 compared to last year (this may be related to the first point). Third, CEFL shifted from a 60:40 equity:bond split in 2014 to a 33:67 equity:bond split this year, just in time for the oil-induced credit contagion to wreck havoc with the high-yield debt CEFs in the index. Certainly, a -32.7% YTD price return and -18.4% YTD total return cannot be described as anything other than disappointing for CEFL unitholders. CEFL data by YCharts Will 2016 bring brighter skies for CEFL? This I cannot say for certain. However, it is interesting to note that the predicted portfolio for 2016 contains several MLP CEFs, namely KYN, CEM, NTG, and FEI, whereas this year’s index contained none. Moreover, a myriad of high-yield bond funds will remain or are newly added to the predicted 2016 portfolio. Thus, it remains likely that the fate of CEFL will remain closely tied with the fortunes of the high-yield credit market for the foreseeable future.