Apples to Apples

A reader at Seeking Alpha left a comment on my “Revisiting Yield Products” post from the other day noting that ETFs have recovered much better than CEFs, aka closed end funds. Generically speaking this is probably true but not the best way to look at it.

I mentioned in the post the amounts a few products were down but noted that I had not factored in the yields but that I thought it was still an apples to apples because I did not include the dividends for any of them. In that context, within the same group it gives some idea of relative return but does not give an idea of relative return compared to other segments as implied by the comment comparing ETFs and CEFs.

One of the call writing/put selling CEFs I looked at was NFJ Dividend and Premium Fund (NFJ). For the last five years the price is down 33%. Compare that to another call writing fund and you might be able to make a comparison but comparing it to something like the SPDR S&P 500 ETF (SPY) probably does not deliver an accurate comparison.

Five years ago NFJ was at $24.79 and it closed Friday at $16.61. But in the interim it made 20 “dividend” payments totaling $7.12 per Google Finance. I put the word dividend in quotes in that last sentence because I do not know what portion, if any were capital gains or returns of capital. Adding the payouts back in leaves the fund down 4.2% for five years which although lags the S&P 500, once dividends are added back in, does paint a different long term picture.

For me this does not change the short term picture. For calendar year 2008 NFJ was down 45% and although the payout had not yet been cut I would not say the fund offered much shelter which is not to pick on the fund because most of them did not offer any shelter, actually I don’t know of any call writing CEFs that did.

ETFs on the other hand are the market, the broad ETFs anyway. If the SPX were back at 1565 then SPY would be back at its high (or thereabouts). The managers of the CEFs may have done a good job or a bad job in the face of the crisis but they are actively managed funds and even if they made good decisions during the crisis they could have made bad decisions in subsequent years. There are a lot of variables to this including portfolio decisions and factoring in the payouts.

CEFs can be complicated products as outlined and we’ve made no mention yet of premiums or discounts to NAV which is yet another layer of complication.

I’ve always limited our exposure to these as there is value in tweaking up the yield (this can apply to equity or fixed income) but they can and occasionally do blow up in spectacular fashion. Things may go smoothly for them collectively for years with people getting more and more comfortable with holding increasingly more of them and then whammy (Ron Burgundy reference) they come unglued. This was the case in 2008. This will happen again at some point and the impact it might have on a portfolio will depend on the amount of exposure in that portfolio.

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About the Author: Random Roger