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4 Tactical/Momentum ETFs: A Disappointing 1-Year Anniversary

Summary Four ETFs, introduced late last year, have the ability to switch between stocks and bonds, on a tactical/momentum basis. How did these four funds fare during the August correction? Since inception, only one of the four ETFs has outperformed the global market portfolio. Introduction In a Nov. 2014 article entitled ” Comparing 4 Tactical/Momentum ETFs “, I introduced four newly-debuted tactical/momentum ETFs that have, at the minimum, the ability to switch between stocks and bonds depending on tactical factors such as momentum (thus equity-only momentum funds are not considered). I later provided a short update on the performance of the four ETFs in a Aug. 2015 article entitled ” An Update On 4 Tactical/Momentum ETFs “. In that article, I noted that while the four ETFs averaged only -1.19% over the preceding nine months, underperforming U.S. stocks (via the SPDR S&P 500 Trust ETF (NYSEARCA: SPY )) at +5.35%. However, that update article was published just before the S&P 500’s first 10% correction in several years. The last few months of market action has been…interesting, to say the least, and with the 1-year birthday of these four tactical/momentum ETFs having just recently elapsed, I thought that now would be a good time to review the performance and allocation of these four funds. The funds The four funds included in this analysis listed below. For more detailed information regarding these funds, please refer to my previous article . Cambria Global Momentum ETF (NYSEARCA: GMOM ). GMOM invests in the top 33% of a target universe of 50 ETFs based on measures of trailing momentum and trend. The fund rebalance monthly into ETFs with strong momentum and are in an uptrend over the medium term of approximately 12 months with systematic rules for entry and exit. Global X JPMorgan US Sector Rotator Index ETF (NYSEARCA: SCTO ). SCTO invests in a portfolio of one to five ETFs selected out of a pool of ten U.S. sector ETFs and the iShares 1-3 Year Treasury Bond ETF (NYSEARCA: SHY ). The fund rebalances monthly to invest in a maximum of 5 U.S. sectors that have demonstrated the strongest positive recent performance. If less than 5 sectors have demonstrated positive performance over this time period, the remainder will go to SHY. Global X JPMorgan Efficiente Index ETF (NYSEARCA: EFFE ). EFFE invests in any combination of 13 ETFs drawn from 5 asset classes. The fund rebalances monthly, constructing an “efficient frontier” by calculating the 6-month returns and volatilities of multiple hypothetical portfolios based on different combinations of the index component universe, then selects the combination of assets that resulted in the highest return over the 6 month observation period with an annual realized volatility of 10% or less. Arrow DWA Tactical ETF (NASDAQ: DWAT ). Implements a proprietary Relative Strength Global Macro model developed by Dorsey Wright & Associates, holding approximately 10 broad-based positions. Assets include long/short exposure to domestic, international and emerging market equities and bonds (government, corporate, agency), real estate, currencies and commodities. Details of the four funds are shown in the table below (data from Morningstar ).   GMOM SCTO EFFE DWAT Yield [ttm] 2.33% 0.50% 0.68% 0.39% Total expense ratio 0.94% 0.86% 0.86% 1.52% Management fee 0.59% 0.69% 0.69% 1.22%* Acquired expense ratio 0.35% 0.17% 0.17% 0.30% Inception Nov 4,2014 Oct 22,2014 Oct 22,2014 Oct 1,2014 Assets $25.92M $13.47M $8.11M $7.80M Avg vol. 12K 11K 12K 7.6K Annual turnover 16% 63% – 111% *Composed of management fee 1.00%, other expenses 0.22%. All four funds have low but not negligible volume, and should provide sufficient liquidity for ordinary investors. Additionally, all four funds have increased in assets since a year ago. GMOM increased slightly from $23.85M to $25.92M, while SCTO increased from $11.54 to $13.47. DWAT showed a sizable increase from $5.18M to $7.80. However, the biggest winner over the pats year appears to be EFFE, which more than tripled in size, from $2.58M to $8.11M. Performance Let’s now take a look at the performance of the four tactical/momentum ETFs in 2015, with the U.S. market (via SPY) included for comparison. GMOM Total Return Price data by YCharts The analysis of this total return price chart reveals some interesting features. Firstly, none of the tactical/momentum ETFs were able to keep pace with SPY in the first eight months of the year, i.e. before the August correction. This might not be surprising for GMOM, even EFFE and DWAT, as these draw ETFs from a wide pool of asset classes and not only U.S. equities, which has been one of the best-performing markets during this difficult year. However, the egregious performance of SCTO is concerning. The fact that SCTO underperformed SPY by the largest margin over the first eight months of 2015 is especially surprising given that its investment universe is restricted to only U.S. industry sectors and what is essentially a cash proxy! How on earth did it lag SPY by nearly 10% over the first eight months of the year if its mandate is to “invest in a maximum of 5 U.S. sectors that have demonstrated the strongest positive recent performance.” Global X provides a monthly allocation report for SCTO. We can see from the report that has had significantly allocations to SHY (i.e. cash) during the first eight months of the year, ranging from 20% in Feb. 2015 to 80% in Jul. 2015. (click to enlarge) Can we understand the reasons for SCTO’s serious underperformance compared to both SPY as well as the other three tactical/momentum ETFs? Analysis of the monthly allocations of SCTO suggests that this may have been due to the ETF being too sensitive to fluctuations in the equity markets, causing it to switch very frequently between equity and cash. For example, SPY suffered a -2.96% loss in Jan. 2015, which caused SCTO to switch to 80% equities in defensive sectors such as REITs (NYSEARCA: RWR ), consumer staples (NYSEARCA: XLP ), healthcare (NYSEARCA: XLV ) and utilities (NYSEARCA: XLU ) and 20% cash at the start of February. Of course, SPY then posted a 5.62% return in February, led by high-beta stocks, and the defensively-positioned SCTO sorely lagged during this rally. Similarly, SCTO was 100% invested in equities when SPY suffered a -2.03% loss in Jun. 2015, then switched to 80% cash for July, during which SPY reversed course to the tune of a 2.26% gain. SCTO then switched BACK to 100% equities at the start of August, just in time for the correction. Talk about bad timing! But let’s step back and analyze all four of the ETFs during this period. Responding to the correction The following chart shows the total return performance of the four tactical/momentum ETFs as well as the U.S. equity market and the U.S. bond market (NYSEARCA: AGG ) from just before the August correction to the end of the year. GMOM Total Return Price data by YCharts All four tactical/momentum ETFs dropped sharply with SPY in August as the correction hit. This is not surprising given that most of these ETFs would be expected to have a sizable allocation to U.S. equities given its status as one of the better-performing markets in early 2015. However, what happens after the correction is illuminating. At the start of September, GMOM, SCTO and EFFE decrease suddenly in volatility, suggesting that they have shifted significantly to bonds or cash. This is confirmed at least for SCTO which showed a 100% allocation cash in September. This shift therefore allowed those three funds to avoid the equity market gyrations in September. On the other hand, the performance of DWAT tracked closely with SPY, suggesting that this fund had not yet made a switch away from equity holdings. As expected, none of four ETFs were able to capture the ferocious snap-back rally exhibited by SPY in October (+8.51%). DWAT increased by around half that of SPY, while SCTO also rose slightly due to its 18.6% allocation to REITs and 21.4% allocation to utilities, however, the rest of SCTO was in cash. Rather unfortunately, all four funds appear to have switched back into an equity-heavy portfolio in November and December, just as the rally subsided and choppy market behavior resumed. This can be deduced given that all four ETFs follow the ebbs and flow of the broader market during these two months. Discussion and conclusion To say that all four tactical/momentum ETFs have disappointed in their first year of existence would be an understatement. None of the four funds were able to avoid the August correction of 2015. Three of the four funds (GMOM, SCTO and EFFE) then switched to cash or bond-heavy portfolios in September, which caused them to completely miss the stock market rebound a month later. This phenomenon was more comprehensively analyzed for GMOM in my Nov. 11 article ” GMOM: Momentum Swings From Bonds Back To Stocks “. On the other hand, based on its price action compare to SPY, DWAT appeared to remain fully invested in equities in September, but reduced its equity exposure to approximately 50% in October. As DWAT is an actively-managed ETF, it is not clear whether the delayed reduction of equity exposure involved any discretionary decisions by the portfolio manager. The next chart shows the total return performance, over the past 13 months, of the four ETFs compared to both SPY and a global market portfolio (via the Cambria Global Asset Allocation ETF (NYSEARCA: GAA )) at -1.02%, which Seeking Alpha author GestaltU has proposed is a superior benchmark for global tactical asset allocation [GTAA] strategies than the S&P500. We can see from the chart below that DWAT has had the best total return performance of -2.77% out of the four tactical/momentum ETFs during this time span, followed by GMOM at -6.87%. EFFE and SCTO had the lowest total return performances of -8.02% and -8.96%, respectively. Thus, DWAT was the only ETF to outperform the global market portfolio GAA since last November, and all four ETFs underperformed SPY. GMOM Total Return Price data by YCharts Going forward, what can we expect from these ETFs? Currently, the four ETFs show very different equity/bond distributions (data from Morningstar). SCTO has the highest equity allocation at nearly 100%, followed by DWAT at 74%. GMOM has a nearly 50:50 split of equities and bonds. EFFE is the only ETF with more bonds (60%) than stocks (40%). However, given that at least three of the four funds (all except DWAT, whose schedule is unspecified) rebalance monthly, these allocations are likely to change in January. In terms of the North American (mainly U.S.) versus international allocation of their equity portion, all except GMOM are fully domestic. GMOM contains 87% U.S. equities and 13% international equities. On a personal level, I have sold my holdings of GMOM a few months ago. I have replaced this the iShares MSCI USA Momentum Factor Index ETF (NYSEARCA: MTUM ) (as described in Left Banker’s article here ). My existing holding of the First Trust Dorsey Wright Focus 5 ETF (NASDAQ: FV ) has also done very well. Both have outperformed SPY over the past year. MTUM Total Return Price data by YCharts Note that those two ETFs are momentum-based but are not “tactical” in the sense that they cannot switch to bonds or cash, and moreover they are purely U.S. based. If the U.S. market enters a bear market, it is likely that those two funds will underperform the tactical/momentum ETFs described above. I am simply performance chasing the U.S. market here? Perhaps, but I lost patience in watching the NAV of GMOM gradually decline as it got caught between whipsaws. With my sale of GMOM, this will likely be my last article on tactical/momentum ETFs for the time being, unless their performance improves to such an extent that they warrant consideration for investment.

10 Charts That Explained Markets In 2015… And Will Impact 2016

Summary 2015 will be remembered for weakness in commodity markets, which bled over into global equities and U.S. high yield debt. In 2016, the divergence between monetary policy in the United States and the rest of the developed world could shape global financial markets. Underpinning all global markets is the ongoing transition of the Chinese economy from one driven by fixed investment to one led by domestic consumption, an unrivaled economic experiment. Below are what I believe are ten of the most interesting charts of 2015. The topics depicted had outsized impacts on financial markets in 2015, and will continue to be important considerations as the calendar turns to the New Year. While oil stole many of the headlines in 2015, falling by nearly two-thirds over the past eighteen months, a broad commodity index moved to its lowest level since 1999. Industrial metals, precious metals, and agricultural commodities were all pressured by a slowdown in global growth. Global Commodities Trade at 16-Year Low (click to enlarge) Source: Bloomberg, (Data through mid-day 12/24/15) Stress in commodity markets was primarily blamed on moderating Chinese growth. While the Chinese growth rate has receded, the absolute change in the size of the Chinese economy was still roughly equivalent to its absolute growth in 2006 and 2007 when the economy was growing at double digit growth rates. In 2015, the Chinese economy grew in absolute terms by the size of the entire Swiss or Saudi Arabian economies. Said differently, the Chinese economy still grew in nominal terms by the size of all the goods and services produced in Switzerland in a year. The China effect on commodity prices has been less of a function of flagging growth rates, and more of a function of the party’s efforts at transitioning the economy from an investment-led to a more domestic consumption-driven economy. Chinese Economic Growth in Absolute Terms is Still Tremendous Source: Bloomberg, World Bank While China had an impact on commodity prices, the strengthening dollar also was a big story. When the value of a dollar rises, it takes fewer dollars to buy a given commodity. These global commodities traded in dollars also become more expensive in local terms, potentially reducing demand. As the graph below shows, the dollar is at its strongest points versus a basket of global peers in the last decade-plus. As the Fed normalizes monetary policy further, higher interest rates on dollar investments could also spur a rally in the greenback, which could further pressure commodity prices and U.S. exporters and multinationals with large foreign businesses. The U.S. Dollar Index Strengthens Against Global Peers (click to enlarge) Source: Bloomberg, (Data through mid-day 12/24/15) A key theme in 2016 could be the divergence of U.S. and European monetary policy. Lend money to the German government today for ten years, and they will pay you 0.64% per year. In April, that figure was an astonishing 0.075%. That figure is still negative for 10-yr Swiss government bonds at -0.09%, meaning investors pay for the privilege of the Swiss government to hold their money in Swiss francs. Higher interest rates in the United States could continue to rotate money from the low rates in the developed world (Europe and Japan) and more stressed emerging economies. Shifting capital flows will create volatility and opportunity. German 10-yr Highlights Ongoing European Economic Weakness Source: Bloomberg Speaking of volatility, U.S. investors may have been unnerved by an uptick in market volatility in 2015, but that volatility paled in comparison to the volatility on the shallower Shanghai exchange. Chinese Volatility Could be Part of New Normal (click to enlarge) Source: Bloomberg, Standard and Poor’s One of my key themes has been the long run risk-adjusted outperformance of lower volatility assets relative to their higher beta cohorts. I wrote an expansive series this summer on the L ow Volatility Anomaly , or why lower risk stocks have outperformed their higher risk brethren over time. That theme continued in 2015 as a low volatility component of the S&P 500 outperformed high beta stocks and the broader market gauge on an absolute basis. Low Volatility Outperforms (Again) (click to enlarge) Source: Bloomberg, Standard and Poor’s; (Data through 12/23/15) This preference for lower volatility assets also extended to the topical high yield bond market ( as described in this piece ). Driven by the underperformance of commodity-sensitive speculative grade bonds, the High Yield Index is under the most stress since early in the economic recovery in 2009. This stress can be seen by the sharp underperformance of lower rated riskier ratings cohorts versus the performance of the higher rated BB junk bonds. Chasing Yields Led to Bad Outcomes in High Yield Source: Barclays; Bloomberg While the last two graphs compared different quality classes within an asset class, the next graph depicts the volatility of the 30-yr Treasury versus the S&P 500. As one would expect upon the unwind of vol-suppressing extraordinary monetary accommodation, interest rate volatility increased in 2015 as shown by the variability of the performance of long duration Treasuries. For investors seeking shelter from equity volatility in fixed income, long duration securities with higher interest rate sensitivity may not be the haven for you. (This is a topic I have also covered in the past through an examination of the volatility of the bonds and equity of Apple (NASDAQ: AAPL )). Equity vs. Rate Volatility (click to enlarge) Source: Bloomberg; Standard and Poor’s; U.S. Treasury The Fed rate increase was in large part driven by a firming in the labor market that pushed the unemployment rate down towards its estimated natural rate of unemployment. A different perspective of the labor market shows that labor force participation is at its lowest level in nearly forty years. While we have seen a cyclical recovery in employment figures, the economy still faces secular headwinds from an aging population. Perhaps, there is more slack in the labor market than suggested by official employment statistics. If so, the failure of wage inflation to materialize could increase the risk of policy error by the Fed. How Healthy is the Labor Market? Labor Force Participation at Multi-Generational Lows (click to enlarge) Source: Bloomberg, Bureau of Labor & Statistics; (Data through 11/30/15) The weak economic recovery post-crisis has kept the U.S. economy from operating at its full potential. Limited investment by a necessarily more austere government after record cyclical deficits has pushed the average age of government fixed assets to its oldest age on record. Similarly, corporations have been more apt to invest in their own securities through record share buybacks than undertake capital investment in the real economy, extending the age of the private capital stock. Older fixed assets and infrastructure could be another structural headwind that pressures domestic economic growth. A Growth Drag from Aging Infrastructure? Source: Bureau of Economic Analysis 2015 was a fascinating year in financial markets. Plunging commodities, flagging Chinese growth, ultra-low rates in Europe, and the underperformance of higher risk investments in the United States all were symptomatic of tumultuous global markets. Domestically with equity multiples still above historical averages and yields on investment grade assets still historically low, forward returns are likely to fail to compensate investors for a continued heightened volatility. Disclaimer: My articles may contain statements and projections that are forward-looking in nature, and therefore inherently subject to numerous risks, uncertainties and assumptions. While my articles focus on generating long-term risk-adjusted returns, investment decisions necessarily involve the risk of loss of principal. Individual investor circumstances vary significantly, and information gleaned from my articles should be applied to your own unique investment situation, objectives, risk tolerance, and investment horizon.

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