2023-07-18 03:14:19 ET
Summary
- The stock market has largely recovered from a rough 2022, driven by the "Magnificent Seven" tech stocks that have boosted the Nasdaq and S&P 500 averages.
- The CNN Fear and Greed Index currently reads 80, indicating "Extreme Greed", and there are concerns about market breadth if the "Magnificent Seven" are removed from the S&P 500.
- BDJ, a closed-end fund that partially hedges its portfolio, is suggested as a good way to hedge against a down market while providing global equity exposure.
The overall stock market index levels are fairly high now and have largely recovered after experiencing a rough year in 2022. Much of this is due to the "Magnificent Seven" tech stocks that have driven the Nasdaq and S&P 500 averages higher.
One indicator I like to keep an eye on is the CNN Fear and Greed Index.
Fear and Greed Index - Investor Sentiment | CNN
This index tracks several indicators, and currently has a reading of 80, which falls into the "Extreme Greed" category. I am also concerned about stock market breadth. If you remove the "Magnificent Seven" growth stocks from the S&P 500, the remaining 493 "frugal" stocks in the index are up much less.
I don't necessarily think we will see a major crash, but it is quite possible we could see an extended sideways or slightly down market for the remainder of 2023. One good way to hedge against a down market is to increase allocations to fixed income. But in this article, I will discuss a closed-end alternative that can provide hedged global equity exposure.
BDJ is a solid closed-end fund that partially hedges its portfolio. It will likely lag the equity indices if the bull market continues through the end of 2023, especially if the Magnificent Seven stocks continue their great run. But it should outperform the S&P 500 index if we see any substantial weakness in the overall market environment.
BlackRock Enhanced Equity Dividend
Ticker: ( BDJ )
Inception Date: Aug. 26, 2005
Total Investment Exposure: 1,652 Million
Total Common Assets: 1,652 Million
Baseline Expense ratio= 0.84%
Leverage: None
Discount= -6.43%
Average 6 Month discount= -2.27%
Annual Distribution Rate (market price) = 8.14%
Current monthly distribution= $0.0562
Annual Distribution= $0.6744
Special 2022 year-end distribution= $0.4915
Rolling NAV Correlation with (GDV)= 92%
Rolling NAV Correlation with (NFJ)= 88%
Rolling NAV Correlation with (CII)= 91%
- Investment Objectives : The primary objective of BDJ is to provide current income and current gains, with a secondary objective of long-term capital appreciation. The fund invests in common stocks that pay above average dividends and potential for capital appreciation. It uses an option writing (selling) strategy to enhance distributions paid out.
- The portfolio is built on companies with potential for dividend growth.
- The primary focus is on large cap, high quality companies.
- The fund tries to reduce portfolio volatility by selling call options on stocks in the underlying portfolio.
BDJ- Sector and Geographic Breakdown (as of May 31, 2023)
BDJ Country Breakdown (BDJ Fund web site)
Under normal market conditions, BDJ writes options on about 50% of its net assets. But this can vary with market conditions. As of Sept. 30, 2022, 49% of the portfolio was overwritten.
BDJ- Top 10 Holdings (as of May 31, 2023)
BDJ- Institutional Ownership
Institutional investors own about 18.55% of the shares outstanding as of March 31, 2023. The top two institutional investors are Morgan Stanley who owned $33.2 million and Cook Wealth Management Group who owned $32 million. These were most likely shares held by financial advisors in managed accounts. I do not see any activist investors with large holdings, and it is unlikely any would get involved in this name unless the discount widens to 15% or greater.
Source: nasdaq.com
BDJ- Investment Performance NAV Return as of 07/14/2023)
YTD + 6.01%
1-Year +12.44%
3-Year +12.57% annualized
5-Year + 6.63% annualized
10-Year + 7.73% annualized
The NAV performance has lagged the S&P 500 somewhat in 2023, largely because of the low allocation to technology stocks.
None of the "Magnificent Seven" technology stocks (AAPL, AMZN, GOOG/GOOGL, META, MSFT, NVDA, TSLA) appear in BDJ's underlying stock portfolio. For many investors this may be OK, because they have significant exposure to these seven holdings directly or in other investment funds. So BDJ can provide good diversification benefits.
BDJ- Three Year Discount History
BDJ has a large, well diversified portfolios. It focuses on global large cap dividend paying stocks, and currently uses covered calls to hedge about 50% of the portfolio.
As of July 14, BDJ was trading at a -6.43% discount which is well below the 6-month and one year averages.
Given the volatile markets we have now, the discounts to NAV can vary quite a bit on a day to day basis. I would not necessarily recommend BDJ as a long term buy and hold. But it can be a good vehicle to use for intermediate term trading positions or as a partial hedge in an equity portfolio.
It may be worthwhile to gradually scale into your BDJ positions by waiting for opportunities when the discount widens on any given day.
For example, over the last five years, BDJ has occasionally traded at double digit discounts. But it also traded at a 2% premium as recently as February, 2023. By scaling in on larger discounts and trimming your position when the discount shrinks, you can often enhance your investment return.
Market Liquidity
BDJ is quite liquid, and trades about 390,000 shares a day. The bid-asked spread is usually only a penny. If you use smaller market orders, you will often get some price improvement.
For further details see:
BDJ: A Solid 8% Yielding Covered Call CEF With A Reasonable Expense Ratio