Tag Archives: management

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.

ETFs Driving Big Gains For Oil Shorts

Summary Money moving in and out of long and short oil ETFs, as low oil price visibility creates more uncertainty. Retail investors should focus on only holding for a very limited time period if they go short. There is nothing to suggest oil prices can rise to sustainable levels in the near future. Traders with a high tolerance for leveraged risk have been making a killing by shorting oil in 2015, led by a number of ETFs that have been, in some cases, up well over 200 percent on the year. There has been a lot more volatility than usual in these types of instruments, as headlines contradicting one another on the movement of the price of oil have money moving in an out of ETFs catering to short and long outlooks for oil. Some large players have been short oil all year, but for the retail investor, it would be wise to take a position in these ETFs for a very short period of time. Some ETFs even suggest and encourage that to their investors, saying in many cases they’re built to hold a position for only one day. All the volatility and inflows and outflows reinforce the fact no one really knows where the price of oil will go, with some like Goldman Sachs saying it could plunge to as low as $20 per barrel, and OPEC recently saying it’s looking at it rebounding to $80 per barrel. In the case of OPEC, that’s primarily because it believes a decrease in American production will begin to offset excess inventory, and start to drive up prices. That is based upon its assessment it has beaten down a lot of the tight or shale oil drillers, which it believes will be a sustainable event. I disagree with that because of the plethora of drilled but uncompleted (DUC) wells, which can quickly and inexpensively be brought online in response to an increase in the price of oil. The truth is, as the market is showing, it could go either way. ETF oil shorting products Before getting into a couple of products and some interesting facts about their performance and why money has been changing hands, it’s worth looking at a couple of elements related to these types of ETFs. As already mentioned, most if not all retail investors should be thinking very limited holding periods for ETFs that short oil. They are extremely volatile, and can move up or down very quickly. If using leverage to make the trade, when including daily rebalancing, the short term movement can be very different than what is expected of the long-term performance data of the ETF or ETN. At this time risk/reward is worth the plunge for those that have some spare capital and a high tolerance for risk. There has to be the belief the price of oil will continue to go down to enter this play. I’m not in this particular play at this time, but I’ve done it with other commodities, and there is a lot of money to be made if you’re right in your assessment of the market. That said, leverage is becoming more of a risk as things get murkier, as conflicting outlooks suggest the underlying catalysts for either direction are no longer as sure – at least in the mind of traders – as they were earlier in the year. That’s one of the major reasons, even as oil has remained under pressure, a lot of money has been taken off the table. VelocityShares 3x Inverse Crude Oil ETN (NYSEARCA: DWTI ) Since DWTI has been one of the top performers in the sector in 2015, we’ll take a look at it first. DWTI offers 3x or 300% exposure to how the S&P GSCI Crude Oil Index ER performs on a daily basis. It does have a fairly high annual fee of 1.35 percent. Since this and others are so volatile, I’m not going to even attempt to look at how much it’s up for the year. It changes significantly in a very short period of time, as you can see in the chart below. Its prospectus states it’s “suitable” to be held by most investors for one day. This is a short-term play where it simply doesn’t matter. Again, larger investors can hold longer if they believe the trend will remain down, but now that the price of oil has fallen so much over the last year, leveraged players are under increasing risk if things surprisingly and abruptly turn around. Daily average volume is a solid 1.8 million shares, but as with its share price, its asset base can be very volatile. (click to enlarge) source: YahooFinance PowerShares DB Crude Oil Short ETN (NYSEARCA: SZO ) Since SZO doesn’t use leverage, it is probably one of the safer instruments in this space, if the term ‘safe’ can be applied. It offers inverse exposure to WTI crude, tracking the Deutsche Bank Liquid Commodity Index, which covers how well a group of oil futures contracts are performing. Over the last three months it is up about 30 percent, and has an expense ratio of 0.75 percent. It trades far less than DWTI, with a 3-month daily average of approximately 35,000 shares. Not nearly as popular as DWTI, it only has net assets of about $28.59 million. (click to enlarge) source: YahooFinance ProShares UltraShort Bloomberg Crude Oil ETF (NYSEARCA: SCO ) My final short to look at is SCO; its goal is to attempt to provide double the daily inverse return of the performance of the Bloomberg WTI Crude Oil Subindex. Over the last three months it has generated a return of about 56 percent. Total expenses amount to 95 basis points. I wanted to highlight SCO because it has been one of the top performing ETFs this year, and yet over $175 million has been removed from assets, according to Bloomberg. That points to growing skittishness over the uncertainty the price of oil is going to go. (click to enlarge) source: YahooFinance The United States Oil ETF (NYSEARCA: USO ) Since USO is a long play on oil it is included to confirm there is a lot of money moving in and out of the long and short ETFs, and not all of it is intuitive. With USO, it has enjoyed near $2.75 billion in new cash investment, even though it has lost over 50 percent of its value so far in the last twelve months. There is no doubt this represents investors believing there is going to be a rebound in oil prices; at least in the short term. This, combined with the outflows from SZO, reiterate concerns over the risk associated with using leverage to short oil, and having no visibility on where the price of oil is going. (click to enlarge) source: YahooFinance Conclusion Shorting oil using ETFs has been very lucrative this year, and my thought is there is a more room to make money for those shorting oil within a limited time frame. For myself, I wouldn’t use leverage any longer because of the low visibility factor concerning oil prices, and I wouldn’t stay in longer than a day. I’m primarily speaking to retail investors here, although until there is more clarity in the short term, larger investors will likely play by similar rules, if they continue to use a shorting strategy in oil at all. My final thought concerning oil is a lot of the headlines are misleading because of the fact OPEC know larger shale producers can put production on hold if the price of oil continues to fall, and if it rebounds, can quickly respond within less than a month with its DUC wells. So the idea it can shut down a competitor like it has in the past, in my opinion, is a misguided one. Shale oil isn’t Russian oil or other types of oil that may take a lot of time to get back into production once it has been shut down. Companies with shale exposure can simply bide their time and wait until the price of oil moves up, and they can almost immediately start production. OPEC can do nothing to stop the larger shale companies. And even if the smaller capitalized companies go out of business, it doesn’t take away the fact the oil is still there. Larger companies will acquire the assets. OPEC has signaled it will continue to produce oil in order to maintain market share. While that has resulted in U.S. companies cutting back on production, there is so much supply out there, it will take a lot more to provide support for oil prices. There is a message being sent, but OPEC doesn’t have the teeth it had before shale, and going forward it has to deal with the fact that once production is lowered and prices start going up, shale companies will simply ramp up production and the cycle will continue. That means eventually OPEC will have to lower production if oil price are to increase at sustainable levels. With Russia so dependent on its oil for revenue, it’s not going to do so, which means this is a long-term trend that at this time, doesn’t have an answer outside of OPEC losing market share. For that reason these ETFs built to take advantage of low oil prices, will make money for those willing to take the risk and holding for very short periods of time. 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.

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.