Tag Archives: nasdaq

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.

A Fork In The Road For XIV

Summary Investors are currently torn between fear mongering pundits and semi-positive economics. An update on the contango and backwardation strategy. The longest period of backwardation in over four years has ended, for now. It has been a very interesting couple of weeks in regards to contango and backwardation. Unlike most of my readers, I don’t get the real time view of the market since I am in the classroom all day. I get a few minutes to check at lunch and that sums up my daily view of the market until around 8pm. My preferred strategy here to profit from the increased volatility has been the contango and backwardation strategy. You can find a detailed description of that strategy, with back testing, here . I always find it fun to go back and read my past writings. When I first started writing for Seeking Alpha, I really wasn’t that great. I believe I had to edit my first article around five times before they agreed to publish it. That is life. Pick yourself up and try again. When I first introduced this strategy on Seeking Alpha, I pointed out that it would not win 100% of the time. Because we are using contango and backwardation as entry and exit points, the strategy becomes difficult when you have futures that consistently bouncing into and out of backwardation. There are two basic options to overcome this problem: Continue on with the strategy. Remember that this strategy will historically protect you from severe losses. Move away from the strategy by holding your position. If you have a long-term positive view for the market and the economy, then you may want to buy and hold a short position in volatility rather than continuing to trade into and out of positions. Before entering these trades you should be fully aware of your potential risks verses the reward. Moving Forward I have stated this previously and it is now being confirmed in the markets. The VIX Index and VIX Futures have moved away from their historically low range. In the short-term I would expect futures to begin trading more towards the historical mean. Take a look at the chart below: (click to enlarge) The VIX will move through cycles of higher and lower ranges of volatility. Historically when the VIX trades in the 10-13 range for an extended period of time, it is followed by a prolonged period where the median VIX will move to a 17-25 range. In periods of economic distress or turmoil that range can be much higher. Let’s look at the VelocityShares Daily Inverse VIX Short-Term ETN (NASDAQ: XIV ) as a basis for discussion here. We know that XIV is driven by the first and second month’s contract within the VIX futures. If the front month’s contract were to fall to 13 from here, that would represent a theoretical gain of around 30% considering all factors. However, if the front month contract were to fall to 17 than XIV would experience a theoretical gain of around 12%. In both cases you would have the added benefit of contango to compound your gains over time. This would make your actual gain larger than what I am reporting for illustration purposes. Over the long-term XIV needs healthy levels of contango to build value and cannot just depend on falling futures contracts. When assessing risk and reward you need to factor in a potential sea change in the median level of the VIX futures. As you can see below XIV is only off about 17% from six months ago despite experiencing a severe haircut. All of this is can be attributed to the wealth built from contango. See below: We have just experienced the longest period of backwardation in over four years: (click to enlarge) Other events that could affect XIV and volatility The Senate and House are currently debating the next potential government shutdown which is scheduled for the end of this month. This would provide a healthy dose of volatility and negatively impact XIV. The larger question here is, is this now how the United States government operates now? I have written past articles, which have been mainly brushed to the side, on government debt levels. I believe our debt is unsustainable with current levels of economic growth. Ultra low rates have helped our interest payments. I would be more optimistic about our government debt if we had respectable politicians who could put their personal agendas aside and come together to actually solve problems. Much of what I see is theater and kicking the can down the road. For example, the current solution to the government shutdown is to pass a measure to get us to December. Slow growth is now the new normal. This has been confirmed by The Fed and recently several CEOs have come on record as stating the same. The concern with slow economic growth and low inflation is that it doesn’t take much to turn the tide the other way. These are larger economic problems that require us to come together and create solutions that last longer than two months. Conclusion For now, the days of ultra-low volatility are gone but not forgotten. Like the business cycle it will always come back around. Whether that will be in a couple months or several years remains to be seen. I remain optimistic on the U.S. economy and hope that Washington has the will power to create long-term optimism through compromise. We need to help foster genuine sustainable growth. Bubbles create great opportunities for us volatility traders, but hurt real people. We may get into a longer period of contango this week that would again align your trading with the contango and backwardation strategy. However, if the market remains choppy we could be moving between the two often. You will have to make a personal decision on how you want to proceed with your investments. Follow me here on Seeking Alpha for regular volatility updates and news you can use. As always, feel free to leave your professional comments below. We always create some great discussions. Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in XIV over 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: The author reserves the right to trade into and out of any products mentioned here and generally will not post exact positions or trades in real time. The author does not give individual buy/sell advice.

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.