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The S&P 500 Is Ready For A Correction – Buy SDS

Summary Historical bull and bear market cycle suggests we are overextended. Earnings are weak, valuations are high. Interest rates are on the way up. This is probably the most hated bull market in history. All along, the bears have been in denial and have been calling for a big crash. To their dismay, the S&P 500 kept moving up and continued making new highs. The bulls have completely demolished the bears. It has reached a point where the bulls don’t give importance to the weak data points; they are happy concentrating on the few positives that still exist. With this backdrop, I want to short the US markets because I believe the markets are ripe for more than a 10% correction with limited upside risk compared to the possible downside. I shall use the historical bull and bear market cycles, the presidential four-year election cycles, the earnings performance and the market valuations to prove my point. As this is a contrarian call, I don’t expect many to agree with me. Previous bull and bear market runs Bull Market data The history of bull market cycles is an important guide, which gives us an idea about the current leg of the bull market. The second half of the 20th century witnessed strong bull runs. I have chosen to study the market cycles from 1942 to the present date; the selected time frame is skewed in favor of the bulls. The first half of the last century wasn’t considered because it had to deal with two world wars and “The Great Depression”. The economical and the geopolitical situation, though fragile, aren’t comparable to that of the early 1900s. Bull Markets with at least a 20% rise, without a 20% drop on a closing basis from 1942 till now SL Start End No of Months % Change 01 28-Apr-42 29-May-46 49.7 157.7% 02 19-May-47 15-Jun-48 13.1 23.89% 03 13-Jun-49 02-Aug-56 86.9 267.08% 04 22-Oct-57 12-Dec-61 50.4 86.35% 05 26-Jun-62 09-Feb-66 44.1 79.78% 06 07-Oct-66 29-Nov-68 26.1 48.05% 07 26-May-70 11-Jan-73 32 73.53% 08 03-Oct-74 28-Nov-80 74.9 125.63% 09 12-Aug-82 25-Aug-87 61.3 228.81% 10 04-Dec-87 24-Mar-00 149.8 582.15% 11 21-Sep-01 04-Jan-02 3.5 21.4% 12 09-Oct-02 09-Oct-07 60.9 101.5% 13 20-Nov-08 06-Jan-09 1.6 24.22% 14 09-Mar-09 ? 82 215.54% Average 52.59 145.40% Maximum 149.8 582.15% Source: BofA Merrill Lynch Global Research, Bloomberg Both in longevity and percentage rise, this market has come a long way and is placed in the third and fourth position respectively. However, the conditions during this bull run are different because the central banks have never printed such massive amounts of money around the world. The excess liquidity was plowed back into the stock markets in search of better returns because gold and a few other base metals peaked in 2011 and have been in a downtrend ever since. Though, this argument holds merit, the current situation is changing. The US Fed has long back stopped its bond purchase, it has gone ahead and raised rates for the first time in a decade. The cushion of the excess liquidity made available every month isn’t there anymore. We shall see higher rates in 2016 and the liquidity situation is likely to tighten further. In the absence of “The Fed Put”, the law of averages should catch up and pull the markets down. Bear Market data Bear markets with at least a 20% drop, without a 20% rise in between on a closing basis since 1942 SL Start End No of Months % Change 01 29-May-46 19-May-47 11.8 -28.47% 02 15-Jun-48 13-Jun-49 12.1 -20.57% 03 02-Aug-56 22-Oct-57 14.9 -21.63% 04 12-Dec-61 26-Jun-62 6.5 -27.97% 05 09-Feb-66 07-Oct-66 8 -22.18% 06 29-Nov-68 26-May-70 18.1 -36.06% 07 11-Jan-73 03-Oct-74 21 -48.2% 08 28-Nov-80 12-Aug-82 20.7 -27.11% 09 25-Aug-87 04-Dec-87 3.4 -33.51% 10 24-Mar-00 21-Sep-01 18.2 -36.77% 11 04-Jan-02 09-Oct-02 9.3 -33.75% 12 09-Oct-07 20-Nov-08 13.6 -51.93% 13 06-Jan-09 09-Mar-09 2.1 -27.62% Average 12.28 -31.98% Maximum 20.7 -51.93% Source: BofA Merrill Lynch Global Research, Bloomberg The average drop during a bear market is 32%; from the all-time high such a fall will take the S&P 500 to 1,452, a level unimaginable now, but that’s what history suggests. I’m not suggesting we will go down to those levels now, even a 20% fall will be highly profitable for us. The risk is, what if this is the mother of all bull markets and the bull run extends by another 70 months with a 300% rise. Anything can happen in the markets; hence, we shall use a stop loss to protect our capital. 2016 is the presidential election year in the US, let’s analyze the stock market performance before and after the new president is elected. Presidential year market performance According to various studies, the stock market gains 9-10% during the first two years of the new president, whereas, the third and the fourth year are comparatively more bullish, yielding higher returns. History suggests a limited upside risk in the next two years; however, since 1952, the last seven months of the election year have yielded positive results but two aberrations have occurred since 2000. The S&P 500 returns from January to March in the election year are mildly positive followed by negative returns in April and May, states a UBS report. I expect the markets to fall during the first five months. Though, the cycles indicate a possibility, stock market returns are closely linked to earnings and valuations. We shall analyze these in the next two sections of this article. There’s a slowdown in earnings Let’s look at a few data points on earnings. According to Bloomberg , the second and third quarter of 2015 have seen negative profit growth for the S&P 500 companies. The expectations for the 4Q 2015 earnings are also negative. A Thomson Reuters report states that compared to 26 positive EPS preannouncements by corporations, there were 86 negative EPS preannouncements by the S&P 500 corporations for Q4 2015. The negative/positive preannouncements ratio in Q4 2014 was 5.1 and in Q4 2015 was 3.3. Both readings are above long-term aggregate ratio of 2.7 taken since 1995. This indicates that the companies are not able to meet their expectations and guidance. Though, Thomson Reuters expects earnings to pick up in Q1 and Q2 of 2016 by 3% and 4% respectively, the current quarter has experienced a downward revision for seven of the ten sectors of the S&P 500. With the current trend, I won’t be surprised if we see negative revisions for the first and second quarters of 2016 going forward. Though 43% of the companies have reported revenue above analyst expectations in Q3 2015, it’s below the long-term average of 60% and lower than the last four quarters’ average of 52%. This shows a declining trend. However, Thomson Reuters states, on the earnings front, 70% has beaten analyst expectations, which is above the long-term average of 63%, and in line with the average of the last four quarters at 70%. In Q3 2015, the share-weighted profits were down 3.3%, the worst figure since 2009, states Bloomberg. Low energy prices and a strengthening dollar are negative for revenues as well as profits. After the first rate hike by the US Fed in almost a decade, the dollar is likely to strengthen further in 2016, with another 0.50-0.75% of rate hike expected by the experts. Some more negative signs for the stock markets In the first nine months of the year, Standard & Poor’s Ratings Services has downgraded US companies 279 times compared to 172 upgrades, this is the worst figure since 2009. Even Moody’s Investors Service has downgraded the credit rating of 108 US non-financial companies against 40 upgrades in the month of August and September. This is the most two-month period downgrades since May and June 2009. According to one metric followed by Morgan Stanley, the ratio of debt to earnings before interest, taxes, depreciation and amortization for investment-grade rated companies was 2.29 in the second quarter. In June 2007, just before the start of the crisis, the same ratio was 1.91. The Wall Street Journal has raised concerns about the balance sheets of the US companies. According to Casey research , the US companies have issued $9.3 trillion in new debt since the financial crisis. The companies have issued record bonds both in 2014 and 2015. Bloomberg business reported that the S&P 500 companies spent 104% of their profits on share buybacks and dividends instead of using it to invest in their business. The last time share payouts crossed 100% was in Q2 2007, just before the end of the bull market. A lot has been written about the junk bond market crash recently. Warning signs are all over the place. What’s the CAPE ratio indicating Are the markets over or undervalued according to the p/e ratio? We use the popular CAPE ratio also known as the Shiller p/e for our study. Shiller p/e Mean: 16.7 This is a popular ratio having both its followers and critics. Though, the reading during the dot-com bubble and Black Tuesday was higher compared to current readings, all other tops have formed at or below the present value. We might not fall just because the ratio is high, but it warrants caution. What does all this indicate We have used multiple studies to arrive at our conclusion about the current state of the bull market. The cyclical study, the drop in revenue and earnings, the red flags in the bond markets, high valuation compared to historical averages all indicate that the average investor should be careful about his holdings. With the US fed tightening interest rates, the trajectory of the rates is on an uptrend. Though, the US economy has displayed strength, the commodity markets, the energy markets, the slowdown in the Chinese economy don’t bode well for the bull run to continue. The markets will likely see a drop in 2016 and we want to go short the S&P via the ETF route. How to take advantage of the drop in S&P 500 Let’s look at a few options one can use to benefit from a drop in the S&P 500. Shorting futures It’s the favorite tool used by professional traders to benefit from a fall. However, it might not be a suitable option for the inexperienced trader, because you have to maintain a margin account to enter the trade. You have to actively manage your positions, you can’t short it and forget it. Buying puts The risk is limited in this trade, however, time value eats into the option premiums. Even if the markets remain at current levels, you will lose all your money if you buy at-the-money or out-of-the money options. Professional traders use complex options strategies to limit their risk and benefit from a fall. To benefit from options, you have to get both the timing, direction and the extent of the fall correctly, which might be difficult. Buying inverse ETFs Leveraged inverse ETFs like the ProShares UltraShort S&P 500 ETF ( SDS) Leveraged inverse ETFs can be bought and sold like stocks. SDS is -2x inversely leveraged against the S&P 500, which means, if the index falls by 1% in a day, the SDS ideally should gain by 2%. In the short term, the correlation is maintained; however, as the calculations are done on a daily basis, over the long term, the correlation is not perfect and can reduce well below 2 times. It’s called as beta-slippage. If the markets rise by 1%, your investment in the SDS will drop by 2%, hence, the risk and reward are maximized. As I expect most of the fall to happen during the first five months, I have advised a buy on SDS to profit from the leverage. In case you are not comfortable with the option of using 2x leverage, you can also buy the ProShares Short S&P 500 ETF (NYSEARCA: SH ), which is -1x inverse correlation to the S&P 500. Here, your risk and reward both are lower compared to SDS. If the markets make a new high and the S&P 500 trades at 2,175 levels (2% more than the current all-time high), we shall close our position and accept our assumption to be wrong. In reference to the current S&P 500 levels, the stop loss is around 5% and the profit objective is more than a 10% fall on the index. Conclusion Calling a top is very difficult, but the indications of a fall are building up. I believe the markets are ripe for a fall and investors should use this opportunity to profit from the fall. I recommend a buy on SDS at the current level of $19.54.

Why This Metric Will Ensure You Pick Wonderful Stocks

Summary I will select stocks for my son’s portfolio using five simple questions that are based on a strategy that returned 850 percent in the past 20 years in a backtest. This article focuses on the first question: do the financial statements indicate the company will generate attractive returns on invested capital? I introduce a traffic light system that separates industries with great economics and high returns from poor industries using a dataset of 3000 companies. In the next several weeks I will elaborate on each of the five questions using numerous examples; in the coming months I will start selecting real stocks. What if the next time you buy a stock you can only look at one financial metric, which one would you choose? Although I admit this is a less than ideal situation as each (additional) financial metric gives you more clues about the prospects of a company, there is one metric that truly matters: the return on invested capital, or the ROIC. The ROIC measures the company makes on the capital that was put in the company by investors, the suppliers of debt and equity. At the end of the day, an investor cannot but do good, if he or she buys shares of a company that compounds returns at an attractive rate (of course the ‘pieces of the company’ must be bought at a reasonable price) In just a few minutes, I will use the ROIC metric to show in which sectors and subsectors in the stock markets investors should look for to find wonderful companies. But I first want to spend a few words on theory. There are probably more than a dozen ways to calculate the ROIC, but to me the most intuitive way is the calculation used by Columbia professor Bruce Greenwald. For the ‘return on’ part take the EBIT (earnings before interest and taxes) and subtract taxes. In the second step I need to define the variable ‘invested capital’. To get this figure Greenwald simple takes the number at the bottom of the balance sheet (“total assets”) and subtracts from that figure all the so called spontaneous liabilities. Spontaneous liabilities are defined as current liabilities that bear no interest like accounts payable and accrued expenses. CFO’s love these kind of liabilities as they are in a sense free capital and can therefore be subtracted from the balance sheet total to get the real amount of capital the company needs to generate earnings. Divide the first figure by the second figure et voila, you have the return on invested capital. For my son’s portfolio I will be looking for companies that have a long record, preferably 10 years, of a high and stable ROIC that is above a hurdle rate of at least 8 percent (WACC, weighted average cost of capital). Please read this previous article in which I explain a simple 5-question-investment-strategy to find stocks that are likely to yield above average returns. A back test of the strategy resulted in a staggering 850 percent return in 20 years. 5 questions that lead to above average returns Do the financial statements tell I deal with a company that has a moat? Do I understand qualitatively why the company has a moat? Can I buy the company at an attractive discount Does the company have a strong dividend track record? Does the company have a balance sheet I am uncomfortable with? The key takeaway of this article is that for my son’s portfolio, I only want to invest in wonderful companies that generate attractive returns on capital. This is far from easy. The graph below presents the five year average ROIC of the 3000 companies with the biggest market capitalization in both the United States and Europe. Graph: Generating attractive returns is not easy (click to enlarge) *Data from Bloomberg. Starting point was the 3000 largest companies in the United States and Europe. For 654 companies 5 year average data was not available. I also excluded dozen outliers. This results in a dataset of 2346 companies. Bad news.. Only 1327 of the 2346 companies – or about 60 percent – have a ROIC that is higher than 10 percent. Do you believe a hurdle rate of 10 percent is too ambitious in the current interest rate environment? Fair, but even if you assume a WACC of 8 or 6 percent the percentage companies that have a ROIC that is lower than the WACC is still respectively 45.8 and 32.1 percent. The empirical evidence is crystal clear: it is hard to earn returns that are significantly above a reasonable hurdle rate. A traffic light system to screen for wonderful companies As a deep value investor the only criterion to buy a stock is a low valuation compared to the company’s earning power. I did not mind in which industry the firm operated. Now I am shifting my investments from cigar butts to wonderful compounders, I must realize time is a scarce resource. It takes blood, sweat and tears to really understand the business model of a company and the economics of an industry. Therefore it makes sense to me to focus my investment research on companies in industries that are just by nature more likely to crank out attractive yields on capital; i.e. I should focus on the companies on the right side of the graph. Although there are examples of managers that operate extremely successfully in fiercely competitive sectors, I believe getting these companies on your radar is like finding a needle in a haystack. So, what should be the hunting ground of an investor that is looking for wonderful companies? I grouped the 3000 American and European champions in 10 industry segments and calculated the five year average ROIC of each industry using Bloomberg data. The results are presented in the graph below: Green, orange and red: A traffic light system for individual industries (click to enlarge) *Data from Bloomberg. Defined by the GICS-framework. I made a rough distinction between sectors that yield very attractive returns (green color), sectors that yield reasonable returns (orange color) and the ones that earn less than decent returns. The graph learns companies in the Health Care, Utilities, Financials and Energy sector yield returns below 10 percent on average . Most utility companies are regulated which entails they cannot set their own prices, energy companies are extremely capital intensive and in the end commodity businesses (oil and gas prices will make them look good or bad) and health care companies are dragged down by biotech companies that are asset light (barely capital invested) but loss making in the process of making a new medicine leading to extremely negative ROIC’s. In the Consumer staples, IT, Industrials, Consumer discretionary and Telecommunications sector the average return is above 10 percent. The problem with this analysis is that within each of these sectors, there is huge dispersion in returns due to different economics of industries in different subsectors. Therefore, I also calculated the calculated the average ROIC of (68) subsectors within sectors. I am fully aware this is a long list, but I believe it is of tremendous importance to find the right hunting ground. I have a copy of this list as a first check to see if a company I am interested in operates in a sector with favorable economics. Looking for great companies? Look at the top of this list (click to enlarge) I am exaggerating when I say I only want to look at subsectors that yield returns above 10 percent, but since time is a valuable resource, I will spend most of my time in the most attractive corners of the stock market (the top of this list). Please look at this list to see the names of the companies that are part of each subsector. You could also use the list to find wonderful companies yourself. Please note I continue to use the traffic light system. This leads to interesting insights. The sector Consumer Discretionary might be a value creator on average (ROIC: 11 percent), but within this sector the subsector Automobiles is a pure value destroyer with an average ROIC of 3,1 percent. The automobile industry is very capital intensive and extremely competitive leading to low profitability. The finance industry is also fiercely competitive, but the subsector Capital Markets generates returns that are above a decent hurdle rate – think asset management firms such as Schroders ( OTCPK:SHNWY ) and Aberdeen ( OTCPK:ABDNF ) in Great Britain and credit rating agencies like Moody’s (NYSE: MCO ). These companies tend to have very sticky costumers that seem to swallow high tariffs for the services the company provides. You can dig a little deeper again and ascertain that within highly lucrative (value destroying) subsectors there are terrible (great) individual companies. Even the best industries include value destroying companies, while the worst industries have value creating companies. As mentioned before, however, I will look for companies in “green” sectors, in my quest for stocks for my son’s portfolio. Find companies that have their GROWING earnings protected by a moat A high ROIC is great. It is a strong signal a company has some sort of competitive advantage, which not only results in high (economic) profits but often also in stable and predictable financial results. A high (historical long term average) ROIC, however, does not have to entail that new capital investments- for instance investments out of retained earnings – generate the same lucrative returns. A dollar invested in a new Wal-Mart (NYSE: WMT ) store in Arkansas is very likely to be return enhancing for the group, but that same dollar invested in the international activities – where the competitive advantage of the company is much, much smaller – is very likely to destroy value ( read this ). When you invest in wonderful companies it is absolutely critical to find out if the CEO invests in the divisions of the company that have a moat. Clearly, Microsoft (NASDAQ: MSFT ) has a moat with respect to products like Windows and Office, but squandered money on game consoles (Xbox), and a long list of other investments and takeovers (to name a few internet ad bureau aQuantive, $6.3 billion which was completely written off, Skype, $8.5 billion and Yammer, $1.2 billion) I will be looking for companies that are able to grow their sales and earnings while maintaining an attractive ROIC. In general this kind of companies have business models that are scalable, such as the Zara and H&M stores of mother companies Inditex ( OTCPK:IDEXY ) (5 year average ROIC: 28 percent) and H&M ( OTCPK:HNNMY ). Due to huge economies of scale these companies can grow their number of stores and sales in a way that generates economic profits for shareholders. Next article The goal of this series of articles is to construct a value investing portfolio that will pay for my sons college tuition 20 years from now. I will use screens on my Bloomberg terminal to find high-ROIC-reasonable-growth-companies that trade at attractive prices. Filtering stock indices around the world on ROIC is a huge time saver to come to a short list of wonderful companies in a quick way. The most difficult part of stock selection, however, is the qualitative part: do I understand qualitatively why a company is able to generate returns of capital that are consistently above the WACC. This question will be the subject of my next article. Food for thought A wonderful company can reinvest the earnings it does not give back as dividends at a very attractive yield causing a snowball effect that results in very attractive returns for investors. A thing I would like to point out is that it is very reasonable to assume that most new (‘incremental’) investments will yield returns that are significantly lower than the average ROIC in the past years. Although Damudaran explains an interesting formula to estimate the so called marginal ROIC in this paper (for the connoisseur, please see page 51 ), the problem is that there are too much swings in both invested capital and operating income due to the economic fluctuations, accounting alterations and corporate events (think take-overs) to come up with a reasonable estimate. Therefore I use 5 or preferably 10 year ROIC-data to find out if the metric stays consistently above the WACC and combine this with data on (autonomous) sales growth. As mentioned before, calculating the ROIC is not an exact science. As a value investor I always try to be on the conservative side and be very careful to take ROIC, ROCE or ROI metrics that companies provide themselves, as they often use definitions that are very favorable to the company (and the bonuses of top management). When I use Bruce Greenwald’s ROIC method, I know I include goodwill and intangible assets in invested capital and make sure all the costs of doing business are included in operating income (including taxes!). It is beyond the scope of the article but I also correct for accounting that distorts the economic picture (I for instance try to capitalize R&D expenditures that are likely to result in future sales and profits) I am afraid I have to spend a few words on the cost of capital or WACC as well. It really saddens me a bit that I spent months and months during various university courses on complex mathematical models to measure this cost of capital. The honest truth, however, is that these models are elegant and neat in the academic world, but nothing short of useless in the real investment world because all the model assumptions are violated. During the Value Investing course I attended at Columbia, I learned to look at more qualitative things to estimate the return investors require. Greenwald, for instance, looks at the rate of return private equity firms promise to their investors. A private equity fund that invests in risky businesses like biotech should return at least 16 percent. If you assume 16 percent is enough for extremely risky investments, it makes sense to have a significantly lower required yield for a defensive company like Wal-Mart. Do note, even in the current interest rate environment I will never use a WACC that is below 7 percent. I can’t emphasize enough that calculating the ROIC and WACC is far from an exact science! I do believe, however, that investors can see very quickly whether company is likely to earn attractive returns using the ROIC calculations that are outlined in this article. In my next article I will take it one step further and look at qualitative factors that make a company wonderful. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Equity CEFs: Funds To Buy, Funds To Sell From The Major Fund Sponsors

Summary The end of the year will often window dress strong performing funds while others drift lower due to tax-loss selling or simple neglect. Though 2016 may bring more of the same with the strongest stocks and funds continuing their advance, there will still be opportunities to buy and sell from all CEF sponsors. Such is the nature of CEFs to go in and out of favor based on sector exposure but also on nothing more than popularity or seasonality. Instead of my usual table of the best and worst performing equity CEFs for 2015, I’m going to list equity CEFs by the major fund sponsors to make it easier to see and go over. So let’s start with my favorite fund sponsor, Eaton Vance . Eaton Vance has been, by far, the most successful equity CEF sponsor over the last few years though the valuations of their funds have recently gone off in wildly different directions. Here are all of Eaton Vance’s equity CEFs sorted by their total return NAV performances for 2015 through December 30th. Funds in light blue use an option-income strategy and funds in orange use a leveraged strategy. (click to enlarge) Note: Funds highlighted in green have outperformed the S&P 500, up 2.2% including dividends, whereas funds highlighted in red have not Easily the most overpriced fund here is the Eaton Vance Tax-Managed Buy/Write Income fund (NYSE: ETB ) , $16.83 market price, $15.61 NAV, 7.8% premium, 7.8% current market yield . At a whopping 7.8% market price premium despite having one of the worst NAV performances of the group and one of the lowest yields, ETB is at the extreme end of its valuation range. Sure, ETB has historically been a great fund, something that I have pointed out numerous times since 2011 when it traded at a sharp discount. But it’s not going to have near the NAV upside as some of the other Eaton Vance equity CEFs due primarily to its high option coverage. That high option coverage has certainly helped ETB during difficult market periods, especially during 2008. But if you think the broader markets are going to have a more difficult time in 2016, then you really should be owning the Eaton Vance Risk Managed Diversified Equity Income fund (NYSE: ETJ ) , $10.01 market price, $11.23 NAV, -10.9% discount, 11.1% current market yield . ETJ has its faults and it’s typically been my least favorite of the Eaton Vance option funds, but there’s no question that ETJ will provide investors with more downside protection if the markets turn defensive. So why is a premium market price such a bad thing? Well, it’s not if its deserved (which very few funds are). But realize that not only are you paying more than what the portfolio is worth but more importantly you are not getting the yield the fund is actually paying. ETB has to cover its NAV yield of 8.3% to grow its NAV, but a buyer at market price would only get 7.7%. Maybe not a big deal to a small investor but to an institutional investor who may own hundreds of thousands of shares, that’s a big difference. So here in lies the problem. You cannot expect a more sophisticated investor to accept a yield less than what the fund is paying so you should not expect sophisticated investors to establish positions at a premium valuation. So then you are left with investors who buy entirely due to window dressing their existing positions here at year-end or from unsophisticated investors who establish new positions because the fund is in an uptrend or has been highlighted, like ETB was in Barron’s on November 28th. ETB at a $16.90 market price and a $15.65 NAV is wildly overpriced when you could buy other Eaton Vance equity CEFs that have had better NAV total return performances this year and have much higher yields. The Eaton Vance Tax-Managed Global Diversified Equity Income fund (NYSE: EXG ) , $8.81 market price, $9.77 NAV, -9.8% discount, 11.1% current market yield, has been beating ETB at the NAV level all year but for some reason here at year end the market prices have diverged dramatically, perhaps due to window dressing or perhaps due to concerns about the global outlook in 2016. Now has ETB’s NAV crushed EXG’s NAV since their inceptions? Yes, it’s not even close, but that’s all in the past and there are reasons why. First and foremost, EXG is a global option income CEF with a low 47% option coverage whereas ETB is purely US-based stocks with a high 93% option coverage. So when you go through difficult market periods, especially in 2008, ETB’s NAV will hold up far better. Combine that with EXG having the unfortunate timing of going public in 2007 vs. ETB in 2005 as well as EXG having the highest overseas stock exposure of any of the Eaton Vance option funds and that helps explain why ETB’s NAV has held up so much better than EXG’s over the years. Today however, the two funds’ top 10 positions are really not that much different despite EXG’s global footprint. So why would you pay a premium and receive a discounted yield when you could buy a fund at a steep discount and receive a much higher windfall yield? Certainly, EXG has more risk/reward with its low option coverage and a relatively high NAV yield that is more difficult to cover, but I believe that is largely offset by the huge valuation discrepancy between the funds. EXG also is one of the largest CEFs out there at almost $3 billion in assets whereas ETB is one of Eaton Vance’s smallest at only $400 million in assets. The other Eaton Vance option-income CEFs I would be buying are the Enhanced Equity Income II fund (NYSE: EOS ) , $13.70 market price, $14.54 NAV, -5.9% discount, 7.7% current market yield, and the Tax-Managed Dividend Equity Income fund (NYSE: ETY ) , $11.23 market price, $11.95 NAV, -6.0% discount, 9.0% current market yield. I’m neutral on ETV and ETW due to valuations though I recently bought ETW again on weakness between $10.90 to $11.15. I am also now neutral on EOI after the strong move it has made recently and in fact I have sold most of my position (EOI was actually my second largest position though I did not write about it much). In essence, I have swapped EOI and ETB for ETW and EXG and continued to add to positions in EOS and ETY. Of the Eaton Vance leveraged CEFs, my favorite currently is the Tax Advantaged Global Dividend Income fund (NYSE: ETG ) , $15.59 market price, $17.18 NAV, -9.3% discount, 7.9% current market yield , though these funds can go in and out of favor on short notice as well. Leveraged CEFs are generally more volatile than option-income CEFs though I don’t think you can get much better than the Eaton Vance leveraged funds even if the Eaton Vance option-income get all of the attention. The Nuveen Equity CEFs The second most successful equity CEF family over the last few years have been from Nuveen though this is a decidedly mixed bag. Nuveen also has a broad lineup of option-income CEFs and leveraged CEFs even though Nuveen is much more known for its wide selection of fixed-income and muni bond CEFs. Here are Nuveen’s equity based CEFs once again sorted by total return NAV performance for 2015 through December 30th. (click to enlarge) Of this group, the sweet spot is really in the middle. (NASDAQ: QQQX ) and especially (NYSE: BXMX ) have become a bit pricey after the strong moves they have made. QQQX used to be my largest position though I sold most of the position in the fall to add to BXMX when it was down. Now I have sold most of my BXMX after its recent strong move as well. Certainly, both funds have been great this year and I would buy them back on lower valuations. But I think the opportunity in the Nuveen equity CEFs going into 2016 is really in the two index funds, the S&P 500 Dynamic Overwrite fund (NYSE: SPXX ) , $13.41 market price, $14.82 NAV, -9.5% discount, 7.8% current market yield, and the Dow 30 Dynamic Overwrite fund (NYSE: DIAX ) , $14.45 market price, $15.90 NAV, -9.1% discount, 7.4% current market yield . Both SPXX and DIAX represent more value related stock portfolios compared to QQQX and BXMX, which are more growth oriented. Though BXMX is very defensive with its option strategy and is suppose to be more S&P 500 index related like SPXX, in reality the fund is more growth oriented. BXMX also is the only Nuveen option fund managed separately from Nuveen, managed by Gateway Advisors , who have obviously done a great job. Though certainly more risky, the Nuveen equity CEF I actually like the best for 2016 is the Tax-Advantaged Total Return fund (NYSE: JTA ) , $11.70 market price, $13.22 NAV, -11.5% discount, 9.3% current market yield. JTA is a relatively small fund that can make big moves due to its 30% leverage in global dividend stocks and senior loan securities. JTA is not for the faint of heart. But with a 9.3% current market yield (8.2% NAV yield) and a -11.5% discount, I believe JTA offers excellent risk/reward in a rising interest rate environment and a contrarian global equity rebound in 2016. I also like JCE and JTD as part of the sweet spot middle group of the Nuveen funds but I would forget about JGV which has been a disaster for longer than I can remember. I gave JGV a chance with this article in May of this year, Now Is The Time For The Nuveen Global Equity Income Fund , but it has done nothing but disappoint. Conclusion Due to the length of this article, I will be back with my next round of equity CEFs to buy/sell form fund sponsors, including BlackRock and Voya .