QQQX - Equity CEFs: Bought Some ETJ Yesterday

2023-09-14 14:51:15 ET

Summary

• Equity CEF shareholders seem to be exhibiting frustration despite the broader market rally.
• Mega-cap technology stocks are driving performance in SPY and QQQ, leaving other stocks and fund classes lagging.
• Like in March, banks and financial institutions may be selling off equity CEFs again to raise cash to shore up their balance sheets.
• And if that's the case, what does that say for the sustainability of the broader market advance?

We're starting to see some frustration set in on some equity CEFs, which seems ludicrous when the broader market, at least as represented by the S&P 500 ( SPY ) , $450.25 real-time market price , +0.85% , and the Nasdaq-100 ( QQQ ) , $377.25 real-time market price, +0.8% , continue to rally and soak up all the liquidity it seems.

I mean, even the Dow Jones Industrial Average ( DIA ) and the Russell 2000 Small Cap ( IWM ) couldn't rally yesterday and were down -0.2% and -0.7%, respectively.

It really has become, once again, the mega-cap technology stocks driving all the performance in SPY and QQQ while everything else seems to lag. I hope you believe me now when I have said for months that you have to own SPY and QQQ and the ETFs that correlate with them, if you want to keep up. Otherwise, you're being left behind, and yes, the frustration is building among big and small investors.

Yesterday, the Eaton Vance Risk-Managed Diversified Equity Income fund ( ETJ ) , $7.77 closing market price , dropped -1.7% for no reason when all of a sudden, 50,000 shares were offered at the market price over a matter of minutes.

This is what it looked like for ETJ over the last 36 hours:

I bought shares at $7.75 , which represents a -9.1% discount. That's not a washout price, but I always want to at least buy some shares when there is a "get me out now" seller who has just seen enough.

And why not? Look at ETJ's 1-Year Premium/Discount chart. And it's not like ETJ is doing poorly. Its NAV is up 12.6% YTD, easily covering its 8.2% NAV yield:

And if you think ETJ is unique, it's not . Here's the No. 1 performing equity CEF, the Nuveen Nasdaq-100 Dynamic Overwrite fund ( QQQX ) , at $22.94 current market price, with a total return NAV up 28.6% YTD:

There's nothing not to like about QQQX, and yet, institutions, like leveraged banks and financial institutions, I believe, are offering up shares of just about all the equity CEFs they own.

QQQX owns pretty much the same stocks as QQQ, only it sells index options against roughly 53% of its portfolio value while offering a 7.3% current market yield.

Note: All the Nuveen CEFs, including QQQX went ex-div today.

Why are we seeing so much supply in CEFs? I believe many banks and financial institutions continue to see extreme stress due to their commercial real estate loan portfolios, deposit losses due to low interest on cash, etc. And this is their response to raise cash, de-leverage and try and shore up their balance sheet.

But if this is happening to the strongest CEFs, in which valuation and NAV performance don't matter, what does it say about the broader markets?

ETJ, on the other hand, is a VERY defensive option income fund that, if we DO get another banking crisis soon, probably in the regional banks again, its NAV should ride out any market pullback.

I can't say for sure that there will be another financial fallout, and I'm sure there's a lot of behind-the-scenes activity to ensure that doesn't happen again.

But if it does happen, expect to see more frustration in CEFs that could see more panic drops to take advantage of. It's really insane to be talking about 52-week lows and more "just get me out now" selling when the broader market averages look like everything is fine and dandy. Truly amazing.

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