A couple of weeks ago I put up a post about a guest on Street Signs named Bryan Perry who came on with some high yielding investment ideas.Yesterday he was back on with three covered call CEFs; Small Cap Premium & Income Funds (RCC), Blackrock Enhanced Equity Yield & Premium Fund (ECV) and S&P 500 Covered Call Fund (BEP).
All three sell options and have colossal yields. Conceptually these are meant to track buy-write indices. There are various studies around that show the buy write indices capturing most of the market's move up with just a slice of the volatility. The chart compares the three CEFs mentioned in the segment to the CBOE Buy Write Monthly Index (^BXM).
As you can see the three CEFs are much more volatile than the index ( I realize that RCC is a small cap product and BXM is large cap but I didn't want anyone to go cross eyed looking at the chart), ex dividend discrepancies notwithstanding, due primarily, I believe, to swings in the premium and discount to NAV although RCC's NAV appears to be more volatile than the others (chart not pictured).
I am a very big believer in covered call funds, I first wrote about them in October 2004 and have maintained a position personally and for clients in one of this type of fund for almost as long. But as the chart shows they are not without volatility. I continue to urge moderation with the concept. All along I have talked about only one fund at a 3%-4% portfolio weight.
It was not clear to me from the CNBC segment if Mr. Perry was suggesting owning all three funds or not but I would not take a larger position that 3 or 4% as a function of risk management. Too much of anything is not a good idea and keep in mind I urge this moderation as someone who is very favorably disposed to the concept.
All of that being said I would drop the one CEF I currently use in this space in a heartbeat if an ETF provider would create an ETF that mimics the BXM or the BXY (BXY is based on out of the money while BXM is at the money)....again at a 3-4% weight only.
7 comments:
roger, i appreciate your continued effort to cover (no pun) yield as part of a portfolio. As a kind of primer, what are the different categories that you would consider as a vehicle for yield( e.g. covered call writing, treasuries, preferred stock, dividend capturing..by the way good write up on alpine cef..etc)? At this point in time, I think of myself as being in a fairly typical investment situation---retired with the vast amount of savings in self directed ira/401k rollover. I'm older and want to start learning to use less equities. I'm thinking of 70% equities with the primary purpose of appreciation and 30% with a mix of vehicles aimed at yield. My question is just a little bit of a tall order, but you've gotten my attention about the value of yield and lowering portfolio volatility.
With yesterday's IRS ruling that ethanol blending will be considered Master Limited Partnership qualified income, tax code section 7704 (d)(1)(E), I think that MLPs such as Kinder (KMP), Valero (VLI) and Teppco (TPP) could have very rewarding tax advantaged yields and modest capital gain appreciation.
All have run up in price of late, but they are worth looking at on a pullback.
I own KMP for some clients with about a 3% weight. Every once in a while they can be volatile. I used to own another one of these that was much more volatile than KMP. It went a up a ton, I sold and have not looked back since.
Possible fixed income allocation;
35% short term treasuries (or munis), short term until the curve gets a little friendlier
20% TIP exposure I use the TIP ETF
10% Foreign for now I use a CEF
15% preferred stocks individual issues 5% each
10% convertible bonds I use a CEF
The balance depends. For someone with normal stock market volatility I might think of a covered call CEF. Someone with less tolerance for normal stock market volatility I think of a covered call CEF as part of the equity exposure.
Some times I use more or less TIP exposure too.
Rogers..once again, thanks for the income allocation description...just the kind of outline I was hoping for, but where would covered call writing fit in?
from above....
"The balance depends. For someone with normal stock market volatility I might think of a covered call CEF. Someone with less tolerance for normal stock market volatility I think of a covered call CEF as part of the equity exposure."
Roger,
Would the same apply to ETV or ETW?
Thanks,
REW, the short answer is yes. Both of these funds (per the description on ETFconnect) have little wrinkles that could help a little or be a small lag but otherwise they really are different choices in the same product segment.
I do not know if either fund is a better way to go.
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