YYY - CEFS: A Well-Managed Well-Performing And High-Yielding Closed-End Fund ETF
2023-05-15 07:31:03 ET
Summary
- The Saba Closed-End Funds ETF is managed by Boaz Weinstein.
- CEFS provides income-oriented investors a diversified access to the closed-end fund universe.
- CEFS pays a stable monthly dividend and yields more than 9%.
- CEFS is hedged against rising interest rates.
Closed-end funds are like their name suggests closed-end funds, unlike ETFs, which are open end funds. Both ETFs and CEFs are traded on an exchange, but ETFs trade always close to their net asset value while CEFs can trade at a discount or a premium to their NAV. CEFs are mostly actively managed while ETFs are often passively benchmarked. Another difference is the use of leverage which is common among CEFs, but not really among ETFs.
There are a few ETFs that invest in CEFs. The best performing is the (actively managed) Saba Closed-End Funds ETF ( CEFS ). CEFS is hedged against rising interest rates and this is certainly contributing to its outperformance.
The London Whale
The "London Whale" is the nickname of a former JP Morgan trader who took massive positions in credit default swaps (CDS), insurance policies that payout when borrowers default. He earned this nickname among hedge funds who took the opposite position. One of those hedge funds was Saba Capital Management, a credit-focused hedge fund headed by Boaz Weinstein.
The "London Whale" was selling billions of dollars of notes for the so-called Investment Grade Series 9 10-year Index CDS. Noticing that the price index was lower than Saba's models indicated, Weinstein began buying CDSs on the index. In the end, JPMorgan had reportedly lost $6.2 billion.
CDSs were created in the early 1990s by Bankers Trust. When Weinstein joined Deutsche Bank in January 1998, the bank had just acquired Bankers Trust. He became the only person at the bank trading CDSs and made nice money when Russia defaulted and during the LTCM-crisis.
By 2001 Weinstein was managing an internal hedge fund within Deutsche Bank with about $30 billion in positions. He named his proprietary trading group "Saba" (which is the Hebrew word for grandfather). In 2009 Weinstein left Deutsche Bank to set up his own (credit focused) hedge fund Saba Capital Management.
Saba is also managing the Saba Closed-end Funds ETF, a so-called closed-end fund ETF. Since the inception of the fund in 2017 the portfolio managers are Boaz Weinstein, Pierre Weinstein and Paul Kazarian.
Closed-end fund ETFs
Besides CEFS, there are two other important closed-end fund ETFs: the Invesco CEF Income Composite Portfolio ETF ( PCEF ) and the Amplify High Income ETF ( YYY ).
Closed-end fund ETFs give investor a diversified access to the closed-end fund universe and its special features like the possibility of trading with a premium or a discount to NAV and the use of leverage. Both features can help in providing both capital appreciation and high dividend income. All three closed-end fund ETFs have dividend yields between 9 and 10%!
Dealing with closed-end funds and their leverage results of course in higher costs. All three closed-end fund ETFs have expense ratios between 2 and 3%.
CEFS has more equity exposure and uses leverage and hence outperformed the other two during the rising stock markets until the end of 2021.
Figure 1: Total Return Chart (Yahoo! Finance, Author)
But also when interest rates started to rise and equity and bond markets fell, CEFS kept outperforming.
Figure 2: Total Return Chart (Yahoo! Finance, Author)
CEFS is hedged against rising interest rates and this is certainly a contributing factor in this more recent outperformance.
Such "all weather" outperformance must be the merit of the (active) management of the fund. On the top level CEFS seeks to generate high income by investing in closed-end funds trading at a discount to net asset value, and hedging the portfolio's exposure to rising interest rates.
The portfolio managers use an investment process that combines fundamental analysis, quantitative analysis and proprietary screening tools. Those screens dynamically rank closed-end funds across a variety of factors including yield, discount to NAV and the quality of the underlying securities. The managers actively try to capture the widening and narrowing of discounts to net asset value. CEFS may also invest in CEFs that are, (or the portfolio managers believe may become) the subject of an activist campaign by a shareholder whose aim is to eliminate or reduce the discount to the NAV.
Currently the average discount to NAV of the portfolio is 13.5%.
Figure 3: Portfolio information (Saba Capital Management)
The investments in CEFs are evenly split between equities and bonds.
Figure 4: Asset class exposure (Saba Capital Management)
About a quarter of the equity exposure is invested in midstream energy companies and MLP CEFs like Clearbridge Energy Midstream Opportunity Fund ( EMO ) and Clearbridge MLP and Midstream TR Fund ( CTR ).
Figure 5: Top 10 holdings (Saba Capital Management)
Unlike PCEF and YYY, CEFS is not in a long term down trend. Another reason to prefer CEFS.
Figure 6: Trends (Yahoo! Finance, Author)
Conclusion
Closed-end fund ETFs can give investor a diversified access to the closed-end fund universe and its special features like the possibility of trading with a premium or a discount to NAV and the use of leverage. Those features can help in providing both capital appreciation and high dividend income.
The Saba Closed-end Funds ETF is the only one of the closed-end fund ETFs we would buy. It outperforms regardless if stock and/or bond markets are rising or falling. Unlike PCEF and YYY it is not in a long term down trend.
Income oriented investors should add CEFS (and its 9.35% dividend yield) to their toolkit. Buy!
For further details see:
CEFS: A Well-Managed, Well-Performing, And High-Yielding Closed-End Fund ETF