ETO - ETO: Solid Global Equities Fund Yielding 7.1%

2023-07-14 07:29:34 ET

Summary

• The Eaton Vance Tax-Advantaged Global Dividend Opportunities Fund is a global equities-focused closed-end fund that offers high total returns and high current income.
• The ETO fund has a global stock portfolio, with 40% invested in U.S. equities, 40% in global equities, and 20% in fixed-income securities, and pays a 7.1% forward distribution yield.
• Despite a challenging 2022, the ETO fund is considered a solid choice for income-oriented investors due to its long-term track record of delivering total returns sufficient to fund its distribution.

After writing several critical articles on Eaton Vance closed-end funds ("CEF"), it is refreshing to finally come across an Eaton Vance sponsored fund that is not an amortizing 'return of principal' fund that the firm wrote a whitepaper warning against.

The Eaton Vance Tax-Advantaged Global Dividend Opportunities Fund (ETO) is a global equities-focused CEF that aims to provide a high level of total returns and high current income.

The fund has a global stock portfolio with roughly 40% invested in U.S. equities, 40% invested in global equities, and 20% invested in fixed income securities. The ETO fund pays an attractive 7.1% forward distribution yield that is backstopped by a 9.6% average annual return over 5 years.

For income-oriented investors, I believe the ETO fund is a solid choice. I rate ETO a buy .

Fund Overview

The Eaton Vance Tax-Advantaged Global Dividend Opportunities Fund is a closed-end fund that aims to provide a high level of after-tax total returns from a portfolio of dividend paying common and preferred stocks. The ETO fund may use leverage to enhance returns. As of March 31, 2023, the ETO fund has 21% effective leverage.

The ETO fund currently has $410 million in net assets and charges a 1.59% total expense ratio (Figure 1).

Portfolio Holdings

Figure 2 shows the ETO fund's asset mix as of March 31, 2023. As mentioned above, the ETO fund primarily invests in dividend paying equities, with U.S. equities comprising 38.5% of the portfolio and foreign stocks 43.4%. The ETO fund also holds a handful of investment grade bonds (9.3%), preferred stocks (3.8%), and high yield bonds (2.8%).

Figure 3 shows the ETO fund's sector allocation and geographical mix. Relative to its benchmark, the MSCI World Index, the ETO fund is overweight Financials (25.6% vs. 15.0%) and Industrials (13.0% vs. 11.0%). It is underweight Technology (15.8% vs. 20.4%), Consumer Discretionary (8.3% vs. 10.6%) and Communication Services (5.3% vs. 7.0%).

Returns

The ETO fund has delivered solid historical returns, with 3/5/10/15Yr average annual returns of 12.6%/9.6%/9.9%/6.6% respectively to June 30, 2023 (Figure 4).

However, one word of caution is that the ETO fund's returns can be a little volatile, as the ETO fund has exhibited higher returns and higher volatility than its peers, the Global Allocation category in Morningstar's database (Figure 5).

Also, it is worth mentioning that over the long run, the ETO fund has been able to keep pace with its benchmark, the MSCI World Index, as modeled by the iShares MSCI World ETF ( URTH ) in Figure 6.

The ETO fund has delivered 3/5/10 yr average annual returns of 12.6%/9.6%/9.9% compared to 12.4%/9.3%/9.7% for the URTH ETF. This is an impressive result as typically, high yielding funds tend to trade off total returns in exchange for higher dividend yields. In ETO's case, investors seem to be able to enjoy solid total returns and high current income at the same time.

Distribution & Yield

Speaking of ETO' distribution, the ETO fund's solid returns backstops a generous monthly distribution, currently set at $0.1374 / month or a forward 7.1% yield on market price. On NAV, the ETO fund is yielding 6.5%.

The ETO fund's distribution is funded from a combination of net investment income ("NII") and realized gains (Figure 7).

Unlike some other Eaton Vance CEFs that I have written about recently like the Eaton Vance Limited Duration Income Fund, I do not have major concerns with the ETO fund's high distribution yield. This is because over the long run, say over 5 years, the ETO fund has generated average annual returns of 9.6% on NAV, which is sufficient to fund its 6.5% of NAV distribution yield.

My conclusion is confirmed by an analysis of the ETO fund's historical NAV profile, which does not show the amortizing pattern characteristic of 'return of principal' funds (Figure 8).

Figure 9 shows the EVV fund's historical NAV for comparison. Notice EVV's historical NAV is in perpetual decline.

In fact, I believe the quickest way for investors to tell if a high yielding fund should be avoided is to pull up the fund's historical NAV over a few years. Amortizing 'return of principal' funds all show the classic declining NAV pattern. This is because either the fund needs to liquidate its portfolio to fund an unsustainable distribution yield or the fund is stretching for yield and suffering investment losses.

ETO Trading At A Modest Discount

Another attractive attribute of the ETO fund is the fact that the fund is currently trading at modest 8.6% discount to NAV (Figure 10). This is the widest discount to NAV in a number of years and may not be justified as the fund's holdings tend to be liquid common and preferred equities.

The ETO fund began trading at a discount to NAV in late 2022. I believe it is related to the fund's distribution cut from $0.1792 / month to $0.1374 / month, which was announced on November 1, 2022.

While I believe the fund's distribution cut was a prudent move given the poor investment performance in 2022, it likely rattled many income-oriented investors, who may have sold their holdings of the ETO fund, causing to it trade at a discount to NAV.

Conclusion

The Eaton Vance Tax-Advantaged Global Dividend Opportunities Fund is a global equities-focused CEF that delivers a solid long-term average annual total return and a generous distribution yield; a rare feat.

Although the ETO fund had a miserable 2022, I am not overly concerned about the sustainability of the fund's 7.1% distribution yield as the ETO fund has a long-term track record of delivering total returns that are sufficient to fund its distribution.

I rate the ETO fund as a buy .

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