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X-Raying CEFL (Part 3): Interest Rate Sensitivity

Summary Previous articles in this series investigated the leverage, expense ratio and geographical statistics of CEFL, a 2X leveraged CEF fund-of-funds. This article seeks to analyze the interest rate sensitivity of CEFL by comparing the performance of different classes of CEFs during the interest rate spike of 2015. How sensitive is CEFL to rising interest rates? Introduction This is Part 3 of a series of articles designed to “X-ray” into the holdings of the ETRACS Monthly Pay 2xLeveraged Closed-End Fund ETN (NYSEARCA: CEFL ) to allow investors to better understand the characteristics of the fund. CEFL tracks twice the monthly return of the ISE High Income Index [YLDA], an index that is comprised of high-yielding close-ended funds [CEFs]. The methodology used to construct YLDA has been summarized here . The YieldShares High Income ETF (NYSEARCA: YYY ) tracks the same index as CEFL. In the first article , the equity/debt, leverage and expense ratio of CEFL was analyzed. In the second article , the geographical allocation of CEFL was discussed. In the comment streams of the first two articles, I received a number of comments asking about the interest rate sensitivity of CEFL. This is an especially pertinent question given the mini-“Taper tantrum” that has occurred in early 2015. As the chart below shows, the U.S. 10-year treasury rate has increased from around 1.70% to a peak of 2.50% over short span of less than 6 months. 10 Year Treasury Rate data by YCharts Over the same time period, CEFL has dropped by -3.87% in price, although its total return has been +3.13% after dividends are accounted for. This suggests that CEFL has been holding up quite well despite the recent spike in interest rates. CEFL data by YCharts In this third article, I seek to analyze the debt holdings of CEFL to see how individual classes of CEFs fared during the recent interest rate spike. Methodology CEFL contains 30 CEFs, of which 7 are equity funds, 21 are debt funds and 2 are mixed funds. For this analysis, I only included the 21 debt funds as bonds are more sensitive to fluctuations in interest rates compared to stocks. For each debt CEF, I assigned it a primary classification for its largest type of debt holding (usually 40-100% of the total fund assets). I also assigned the CEF a secondary classification if its second-largest type of debt holding was at least 20% of the total fund assets. The classification types are: [i] corporate bonds [corp], [ii] government bonds [gov], [iii] securitized bonds [sec], which include various agency/commercial mortgage or asset-backed bonds, [iv] senior loans [loan], [v] convertible bonds [CB], and [vi] preferred shares [PF]. Note that this classification does not distinguish between U.S. and foreign bonds. The primary and secondary classifications of the 21 debt funds are shown in the table below. Fund Ticker Assets Primary Secondary DOUBLELINE INCOME SOLUTIO (NYSE: DSL ) 4.38% Corp Sec FIRST TRUST INTERMEDIATE (NYSE: FPF ) 4.28% Pref EATON VANCE LIMITED DURAT (NYSEMKT: EVV ) 4.26% Loan Sec MFS CHARTER INCOME TRUST (NYSE: MCR ) 4.24% Corp Gov BLACKROCK CORPORATE HIGH (NYSE: HYT ) 4.20% Corp WESTERN ASSET EMG MKT DBT (NYSE: ESD ) 4.18% Gov Corp PRUDENTIAL GL SH DUR HI Y (NYSE: GHY ) 4.11% Corp Gov PIMCO DYNAMIC CREDIT INCO (NYSE: PCI ) 4.11% Sec Corp MORGAN STANLEY EMERGING M (NYSE: EDD ) 3.88% Gov ABERDEEN ASIA-PAC INCOME (NYSEMKT: FAX ) 3.43% Gov Corp PRUDENTIAL SHORT DURATION (NYSE: ISD ) 3.15% Corp MFS MULTIMARKET INC TRUST (NYSE: MMT ) 2.84% Corp BLACKSTONE/GSO STRATEGIC (NYSE: BGB ) 2.65% Loan Corp ALLIANZGI CONVERTIBLE & I (NYSE: NCV ) 2.42% CB Corp WESTERN ASSET HIGH INC FD (NYSE: HIX ) 2.19% Corp BLACKROCK MULTI-SECTR INC (NYSE: BIT ) 1.89% Sec Corp WELLS FARGO ADV MULTISECT (NYSEMKT: ERC ) 1.56% Corp Gov ALLIANZGI CONV & INCOME I (NYSE: NCZ ) 1.35% CB Corp WELLS FARGO ADVANTAGE INC (NYSEMKT: EAD ) 1.33% Corp NUVEEN PFD INC OPP FD (NYSE: JPC ) 1.12% Pref INVESCO DYNAMIC CREDIT OP (NYSE: VTA ) 0.96% Loan Corp The performance of each class of debt CEF during the current interest rate spike (Feb. 1, 2015 to date) is compared with a benchmark ETF as identified using the correlation tool from InvestSpy . Corporate bonds 9 of the debt CEFs have corporate bonds as their primary holding, while 8 CEFs have corporate bonds as their secondary holding. All 9 debt CEFs that have corporate bonds as their primary holding are most correlated with the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEARCA: HYG ). The following chart illustrates the 1-year correlation coefficients for these 9 funds arranged from highest to lowest correlation. The following chart shows the total return performance of the 9 debt CEFs with corporate bonds as their primary holding during the most recent interest rate spike compared to HYG from Feb. 1, 2015 to date. HYG Total Return Price data by YCharts We can see from the chart above that DSL has had the best total return performance of +4.98%, while GHY had the worst performance of -4.33% since Feb. 1, 2015. The average of the 9 CEFs was +0.28%, while the benchmark index HYG returned +1.14%. This indicates that the 9 debt CEFs with corporate bonds as their primary holding slightly underperformed the benchmark HYG over this time period. Government bonds 3 of the debt CEFs have government bonds as their primary holding, while 3 CEFs have government bonds as their secondary holding. Of the 3 debt CEFs that have government bonds as their primary holding, ESD and EDD are most correlated with the iShares J.P. Morgan USD Emerging Markets Bond ETF (NYSEARCA: EMB ), with 1-year coefficients of 0.51 and 0.60, respectively, while FAX is most correlated with HYG, with a coefficient of 0.29. Note that all three CEFs are actually either emerging market (ESD, EDD) or Asia-Pacific bond funds. The following chart shows the total return performance of the 3 debt CEFs with government bonds as their primary holding during the most recent interest rate spike compared to EMB and HYG from Feb. 1, 2015 to date. ESD Total Return Price data by YCharts We can see from the chart above that ESD has had the best total return performance of +0.67%, while EDD had the worst performance of -12.80% since Feb. 1, 2015. The average of the 3 CEFs was -6.22%, while the benchmark indices EMB and HYG returned +0.23% and +1.14%, respectively. This indicates that the 3 debt CEFs with government bonds as their primary holding significantly underperformed the benchmarks EMB and HYG over this time period. Senior loans 3 of the debt CEFs have senior loans as their primary holding. All 3 debt CEFs that have senior loans as their primary holding are most correlated with HYG. EVV, BGB and VTA have 1-year correlation coefficients to HYG of 0.40, 0.40 and 0.28, respectively. The following chart shows the total return performance of the 3 debt CEFs with senior loans as their primary holding during the most recent interest rate spike compared to HYG from Feb. 1, 2015 to date. The PowerShares Senior Loan Portfolio (NYSEARCA: BKLN ) is included for comparison. EVV Total Return Price data by YCharts We can see from the chart above that VTA has had the best total return performance of +5.35%, while EVV had the worst performance of +1.65% since Feb. 1, 2015. The average of the 3 CEFs was +3.53%, while the benchmarks HYG and BKLN returned +1.14% and +0.66%. This indicates that the 3 debt CEFs with senior loans as their primary holding significantly outperformed the benchmarks HYG and BKLN over this time period. Preferred shares 2 of the debt CEFs have preferred shares as their primary holding. JPC is most correlated with HYG (0.36), whereas FPF is, somewhat strangely, most correlated with the PowerShares Emerging Markets Sovereign Debt Portfolio (NYSEARCA: PCY ) (0.33). Therefore I have replaced PCY with the iShares U.S. Preferred Stock ETF (NYSEARCA: PFF ) in the following chart. JPC Total Return Price data by YCharts We can see from the chart above that JPC has had the best total return performance of +2.47%, followed by FPP at +0.26% since Feb. 1, 2015. The average of the 2 CEFs was +1.37%, while the benchmarks HYG and BKLN returned +1.14% and +0.11%. This indicates that the 2 debt CEFs with preferred shares as their primary holding slightly outperformed the benchmarks HYG and PFF over this time period. Convertible bonds 2 of the debt CEFs have convertible bonds as their primary holding. NCV and NCZ are both most correlated with the SPDR Barclays Convertible Securities ETF (NYSEARCA: CWB ), with 1-year correlation coefficients of 0.40 and 0.34, respectively. The following chart shows the total return performance of the 2 debt CEFs with convertible bonds as their primary holding during the most recent interest rate spike compared to CWB from Feb. 1, 2015 to date. NCV Total Return Price data by YCharts We can see from the chart above that NCV has had the best total return performance of -1.00%, followed by NCZ at -5.89% since Feb. 1, 2015. The average of the 2 CEFs was -3.45%, while the benchmark CWB returned +5.22%. This indicates that the 2 debt CEFs with convertible bonds as their primary holding significantly underperformed the benchmark CWB over this time period. Securitized bonds 2 of the debt CEFs have securitized bonds as their primary holding, while 2 CEFs have securitized bonds as their secondary holding. The 2 debt CEFs that have securitized bonds as their primary holding as both most correlated with HYG, with PCI and BIT having 1-year correlation coefficients of 0.54 and 0.44, respectively. The following chart shows the total return performance of the 2 debt CEFs with securitized bonds as their primary holding during the most recent interest rate spike compared to HYG from Feb. 1, 2015 to date. The iShares MBS ETF (NYSEARCA: MBB ) and the iShares CMBS ETF (NYSEARCA: CMBS ), which hold agency and commercial mortgage-backed bonds, respectively, are shown for comparison. PCI Total Return Price data by YCharts We can see from the chart above that PCI has had the best total return performance of +2.06%, followed by BIT at -0.33% since Feb. 1, 2015. The average of the 2 CEFs was +0.87%, while the benchmarks HYG, MBB and CMBS returned +1.14%, -0.50% and -1.32%, respectively. This indicates that the 2 debt CEFs with securitized bonds as their primary holding slightly outperformed the benchmark HYG over this time period. Discussion What does this all mean for investors? One major finding that resulted from this analysis is that most of the CEF debt classes in CEFL (including corporate bonds, senior loans, preferred shares and convertible bonds)* are most correlated with the high-yield ETF HYG. This bodes well for investors in CEFL who are worried about rising interest rates since high-yield debt is less interest-rate sensitive compared to investment-grade debt. (*Note that BKLN and PFF did not show up in the top-10 ETFs most correlated with the senior loans or preferred shares CEFs, respectively, indicating that InvestSpy might have for some reason excluded these ETFs from its correlation tool.) Indeed, inputting CEFL into the Investspy’s correlation tool indicates that has been the most correlated with HYG, EMB, JNK, PCY and CWB over the past 1-year, as shown in the chart below (but note that the past 1 year includes the final six months of 2014 which are before the rebalancing of CEFL to its present constituents). Encouragingly, all five of these ETFs and CEFL have outperformed the iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEARCA: LQD ) (-4.75%), the iShares 7-10 Year Treasury Bond ETF (NYSEARCA: IEF ) (-3.46%) and the iShares 20 Year Treasury Bond ETF (NYSEARCA: TLT ) (-12.7%) during the interest rate spike of 2015. This is not surprising because investment-grade debt and treasuries are much more sensitive to interest rates, as mentioned above. The total return performances of these ETFs are shown in the chart below. CEFL Total Return Price data by YCharts In terms of the individual debt classes of CEFL, CEFs with corporate bonds (as their primary holding) averaged +0.28%, government bonds averaged -6.22%, senior loans averaged +3.53%, preferred shares CEFs +1.37%, convertible bonds -3.45%, and securitized bonds +0.87% since Feb. 1st, 2015. The strongest performance of senior loan CEFs (+3.55%) may be rationalized by the fact that these are normally floating-rate instruments that may benefit as interest rates rise, although it should also be noted that the benchmark ETF BKLN was essentially flat over this time period. A quick check on CEFConnect shows that the premium/discount of the three senior loan CEFs (EVV, BGB, VTA) was steady over this time period, suggesting either that the CEF managers were able to outperform the benchmark or that the other components in the CEFs were responsible for the outperformance. Conversely, the weakest performance of the government bond CEFs (-6.22%) may also be understood on the basis that this debt is relatively interest rate-sensitive, although again the benchmark index EMB was actually also flat over this time period. This time, however, the discounts for the three CEFs in question (FAX, ESD, EDD) actually widened by about 2 to 4 percentage points over this time period, indicating that the discount expansion could account for a significant fraction of the underperformance of these CEFs. Moreover, this observation indicates investor pessimism regarding these CEFs, which are actually all emerging market or Asia-Pacific bond funds. The total return performance of the six classes of debt CEFs within CEFL since Feb. 1st, 2015 are summarized in the chart below. Conclusion Based on this analysis of CEF performances during the interest rate spike of 2015, I conclude that CEFL is not very interest rate-sensitive, and investors therefore do not have to unduly worry over the effect of increasing interest rates on CEFL. The main findings supporting this conclusion are: Most of the holdings of CEFL are most-correlated with high-yield debt, which is not very interest rate-sensitive. The five ETFs that are most correlated with CEFL all outperformed investment-grade bonds LQD and treasuries IEF and TLT since Feb. 1, 2015. CEFL itself outperformed LQD, IEF and TLT over the same time period. CEFL contains three senior loan CEFs, which are typically floating rate instruments, and these may provide protection against increasing interest rates. The main limitations of this analysis are: The premium/discount of the individual funds were not studied. Seeking Alpha contributor Lance Brofman has calculated the overall discount of CEFL to be 9.5% on Jun. 1, 2015, an increase compared to 8.6% a month prior, but the overall discount on Feb. 1, 2015 was not determined. The 10-year treasury rate increased from 1.70% to a peak of 2.50% over the past 5 months. Therefore, this analysis may not be valid for interest rate increases that are much greater in magnitude or velocity (although this seems to be an unlikely scenario at the present time). This analysis is only valid until Dec. 31, 2015, when CEFL becomes repopulated with different CEFs due to rebalancing. Finally, as a 2X leveraged fund, the cost of maintaining the leverage of the CEFL (based on 3-month LIBOR) would go up as interest rates rise. While not having an immediate effect on NAV, this effectively increases the total expense ratio of the fund, leading to a drag on NAV over time. I hope this information will be helpful for investors in or considering investing in this fund. Disclosure: I am/we are long CEFL. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

X-Raying CEFL (Part 2): Geographical Distribution

Summary A previous article in this series investigated the leverage and expense ratio statistics of CEFL, a 2X leveraged CEF fund-of-funds. This article presents the geographical breakdown of CEFL. How much international exposure does CEFL contain? Introduction The ETRACS Monthly Pay 2xLeveraged Closed-End Fund ETN (NYSEARCA: CEFL ) is a 2x leveraged ETN offered by UBS. CEFL tracks twice the monthly return of the ISE High Income Index [YLDA], an index that is comprised of high-yielding close-ended funds [CEFs]. The methodology used to construct YLDA has been summarized here . The YieldShares High Income ETF (NYSEARCA: YYY ) tracks the same index as CEFL. While many investors are attracted solely by CEFL’s high yield (currently 20.39% ttm), I believe that it is also important to look “under the hood” of the fund and to understand its characteristics. In a previous article , we delved into the holdings of CEFL to derive relevant leverage and expense ratio statistics regarding this fund. From that analysis, we found that CEFL is approximately comprised of one-third equity and two-thirds debt, CEFL is effectively leveraged by 240%, and CEFL exhibits a total expense ratio of 4.92% per dollar invested in the fund (or 2.05% per dollar of assets controlled), after accounting for acquired fund expenses. This article seeks to present the geographical distribution of CEFL in terms of its overall holdings, or in terms of equity and debt components. Methodology The geographical distribution of the component funds was obtained from CEFConnect , Morningstar or the fund websites. As some CEFs only report their allocation by region rather than by country, it was decided to present the data in terms of region only. The five regions are North America (includes Canada), Europe (includes Russia), Asia Pacific (includes Japan and Australia), Latin American and Middle East/Africa (includes Turkey). There is also a sixth category of “other” due to the fact that some funds do not report beyond their top 10 country holdings. The funds The following table shows the fund name, ticker symbol, % assets, and % of assets in region. Fund Ticker Assets North America Europe Asia Pacific Latin America Middle East/Africa Other GAMCO GLBL GOLD NAT RES (NYSEMKT: GGN ) 4.52% 77.9 11.5 2.1 6.0 2.5 0.0 DOUBLELINE INCOME SOLUTIO (NYSE: DSL ) 4.38% 47.4 13.0 0.0 14.6 0.0 24.9 EATON VANCE TM GL DIV EQ (NYSE: EXG ) 4.28% 55.6 36.2 8.1 0.0 0.0 0.0 FIRST TRUST INTERMEDIATE (NYSE: FPF ) 4.28% 49.2 39.7 0.0 1.2 0.0 9.9 ALPINE TOTAL DYNAMIC DIVD (NYSE: AOD ) 4.27% 53.2 29.0 5.6 0.0 0.0 12.3 EATON VANCE LIMITED DURAT (NYSEMKT: EVV ) 4.26% 90.5 5.4 0.0 0.0 0.0 4.1 MFS CHARTER INCOME TRUST (NYSE: MCR ) 4.24% 67.6 11.8 2.3 0.0 0.0 18.3 CLOUGH GLBL OPPORTUNITIES (NYSEMKT: GLO ) 4.24% 88.9 3.6 12.3 0.0 0.0 -4.7 BLACKROCK CORPORATE HIGH (NYSE: HYT ) 4.20% 100.0 0.0 0.0 0.0 0.0 0.0 ALPINE GLOBAL PREMIER PRO (NYSE: AWP ) 4.19% 31.8 26.9 28.5 3.7 2.2 6.9 WESTERN ASSET EMG MKT DBT (NYSE: ESD ) 4.18% 0.0 25.4 4.5 57.3 0.0 12.8 VOYA GLBL EQTY DIVD FUND (NYSE: IGD ) 4.12% 45.8 39.3 8.7 0.0 0.0 6.2 PRUDENTIAL GL SH DUR HI Y (NYSE: GHY ) 4.11% 69.4 20.0 0.0 2.0 0.0 8.6 PIMCO DYNAMIC CREDIT INCO (NYSE: PCI ) 4.11% 76.1 6.5 12.0 5.5 0.0 0.0 BLACKROCK INTL GROWTH&INC (NYSE: BGY ) 3.91% 11.7 54.5 28.0 1.3 2.1 2.4 MORGAN STANLEY EMERGING M (NYSE: EDD ) 3.88% 0.0 33.3 23.3 43.2 26.6 0.0 EATON VANCE TAX-MGD DV EQ (NYSE: ETY ) 3.81% 92.9 6.6 0.0 0.0 0.5 0.0 ABERDEEN ASIA-PAC INCOME (NYSEMKT: FAX ) 3.43% 2.7 3.2 94.1 0.0 0.0 0.0 PRUDENTIAL SHORT DURATION (NYSE: ISD ) 3.15% 100.0 0.0 0.0 0.0 0.0 0.0 CALAMOS GLOBAL DYNAMIC IN (NASDAQ: CHW ) 3.11% 57.8 24.0 11.5 1.0 1.3 4.4 MFS MULTIMARKET INC TRUST (NYSE: MMT ) 2.84% 100.0 0.0 0.0 0.0 0.0 0.0 BLACKSTONE/GSO STRATEGIC (NYSE: BGB ) 2.65% 100.0 0.0 0.0 0.0 0.0 0.0 ALLIANZGI CONVERTIBLE & I (NYSE: NCV ) 2.42% 100.0 0.0 0.0 0.0 0.0 0.0 WESTERN ASSET HIGH INC FD (NYSE: HIX ) 2.19% 98.2 0.0 0.0 0.0 0.0 1.8 BLACKROCK MULTI-SECTR INC (NYSE: BIT ) 1.89% 84.7 12.6 1.2 0.0 0.0 1.6 WELLS FARGO ADV MULTISECT (NYSEMKT: ERC ) 1.56% 78.8 4.6 2.2 4.5 2.3 7.6 ALLIANZGI CONV & INCOME I (NYSE: NCZ ) 1.35% 84.2 15.8 0.0 0.0 0.0 0.0 WELLS FARGO ADVANTAGE INC (NYSEMKT: EAD ) 1.33% 94.9 4.4 0.1 0.0 0.0 0.6 NUVEEN PFD INC OPP FD (NYSE: JPC ) 1.12% 57.6 35.4 0.0 0.0 0.0 7.0 INVESCO DYNAMIC CREDIT OP (NYSE: VTA ) 0.96% 70.1 19.8 0.0 0.0 0.0 10.1( The following chart shows the frequency distribution of CEFs at different percentages of North American assets, the vast majority of which are U.S. assets. Geographical distribution The respective regions shown in the table above were, after accounting for the leverage of each fund, summed to determine the overall geographical distribution of CEFL. The results are presented in the graph below. We can see from the chart above that North America accounts for just over two-thirds (68.2%) of the assets of CEFL. The second-largest region is Europe, at 14.8%, followed by Asia Pacific, at 8.3%. Latin American and Middle East/Africa represent relatively minor regions at 3.9% and 0.4%, respectively. Finally, 4.4% of the assets were unaccounted for in this analysis. The next chart shows the geographical breakdown for the equity and debt components of CEFL. Recall that CEFL is comprised of approximately one-third equity and two-thirds debt. Note that for hybrid funds, I have made the assumption that the region distribution is the same for the equity and debt components of the fund. We can see from the chart above that the debt portion of CEFL contains more North American exposure (71.6%) compared to the equity portion (57.1%). On the other hand, the equity portion of CEFL contains more European exposure (25.9%) compared to the debt portion (11.4%). Discussion and conclusion This article sought to evaluate the geographical exposure of CEFL. The main conclusion from this analysis was that CEFL contained around two-thirds of North American (primarily U.S.) assets, meaning that the fund has around one-third of international exposure. What does this mean for investors? Obviously, investors who are uncomfortable with any level of international exposure should avoid CEFL, as around one-third of the fund is in foreign assets. However, other investors may be attracted to the diversification benefits offered by the international exposure of CEFL. For example, a portfolio of 70% U.S. stocks and 30% international stocks (close to the geographic allocation of CEFL) has returned 11.4% a year since 1950, which is about 2% more than S&P500, but with about 10% less risk. Additionally, I like that the North American component of CEFL contains a higher allocation to debt vs. equity than the European component of CEFL. European debt is currently low-yielding and hence expensive, with struggling countries like Spain (2.26%) and Italy (2.28%) having the same 10-year bond yields as the U.S. (2.26%), and even lower yields for Germany (0.75%) and France (1.16%). On the other hand, European stocks are a lot cheaper than U.S. stocks, with CAPE ratios of 8.6 and 16.5 for emerging and developed Europe, respectively, compared to 26.0 for the U.S. Therefore, value investors like myself would be especially pleased with CEFL’s higher allocation towards European equities compared to European debt. I hope this information will be useful for investors in or considering investing in the fund. Disclosure: I am/we are long CEFL. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

After Rebalancing, CEFL February Dividend Will Bring Yield To 18.8%

The Rebalancing will result in a smaller, but still large yield. However, the discount to book value will make CEFL more compelling. Leveraged income and carry plays such as MORL and CEFL have underperformed what might have expected given the 10-year treasury bond at 1.80% and Federal Funds still at 0.25%. This underperformance is because, among other reasons, those who said the spike in interest rates was imminent three years ago are even more vocal and convinced it is imminent now. The UBS ETRACS Monthly Pay 2x Leveraged Closed-End Fund ETN (NYSEARCA: CEFL ) underwent a rebalancing at the end of 2014. The first monthly dividend based on the new composition of the index upon which CEFL is based, will be paid in February 2015. The dividend will be based on those components that had ex-dividend dates in January 2015. Of the 30 index components, 29 now pay monthly. Only MORGAN STANLEY EMERGING MARKETS DOMESTIC DEBT FUND INC (NYSE: EDD ) now pays quarterly dividends in January, April, October and July. Thus, it will not be included in the February 2015 CEFL monthly dividend calculation. Additionally, some of the monthly paying components do not have ex-dates in January 2015. These are PRUDENTIAL GL SH DUR HI YLD (NYSE: GHY ), ING Global Equity Dividend & Premium Opportunity Fund (NYSE: IGD ) and PRUDENTIAL SHORT DURATION HIGH YIELD (NYSE: ISD ) . Thus, they also are not included in the February 2015 CEFL monthly dividend calculation even though they have pay dates in February 2015. Those components that have not declared dividends but pay regular monthly dividends are included using the most recent dividend they declared. My calculation using the 26 components expected to have ex-dividend dates in January 2015 is for a February 2015 dividend of $0.2721. This would be the smallest monthly dividend since the February 2014 of $0.2461. In February 2014 there were more quarterly payers in the index than now. The rebalancing is the major reason for the smaller monthly dividends. PIMCO High Income Fund (NYSE: PHK ), one of the highest yielding components has been removed. Some people may be quite happy with this since PHK had such a high premium to book value. The rebalancing is done by a formula and thus any investor complaints about PHK played no part in its’ removal. It could even be considered a case of “be careful what you wish for”. Removal of PHK did significantly improve the discount to book value for CEFL as a whole, but also reduced the dividend. I generally do not do much in-depth analysis of the components in the leveraged ETNs I follow. I take much more of a “top-down” approach rather than a “bottoms-up” approach. Not that there is anything wrong with than a “bottoms-up” approach. It is a matter of how I began to first look at mREITs, then ETRACS Monthly Pay 2x Leveraged Mortgage REIT ETN (NYSEARCA: MORL ) and then CEFL as a high yielding diversifier for MORL that also met my top-down Macro outlook. A few years ago I became convinced that short-term rates were likely to remain low for an extended period (see my article: Federal Reserve Actually Propping Up Interest Rates: What This Means For mREITs ), and I concluded that agency inverse floaters would be the ideal investment vehicle to take advantage of that scenario. I was told by dealers in agency securities that there were very few agency inverse floaters around anymore and that you would not want the ones that were. I wanted an investment with negligible credit risk and no margin call risk that would profit from an extended environment of very low short-term interest rates. As agency inverse-floaters and swaps paying-floating and receiving-fixed were not available to me as a retail investor, I concluded that mREITs and MORL were the next best thing to profit from a continuation of the carry generated by very low short-term rates. This was explained in: Are mREITS The New Inverse Floaters? A few years ago there were many who were very bearish on mREITs based on their view that the period of low interest rates would soon be ending. If I had asked even the most bearish person on mREITs three years ago what would happen if in 2015 the rate of the 10-year treasury bond were to be 1.80% and Federal Funds were still to be 0.25%, they certainly would have said something to the effect that: “well then of course you will make a fortune in mREITs and similar leveraged income and carry plays, but that rate scenario is impossible”. We are now have the 10-year treasury bond at 1.80% and Federal Funds are still at 0.25%. A large part of the underperformance of leveraged income and carry plays such as MORL and CEFL relative to what one might have expected given the accuracy of my interest rate outlook, is due to a number of factors. Most significant is that mREITs and closed-end funds have gone from premiums over book value to large discounts. This is because, among other reasons, those who said the spike in interest rates was imminent three years ago are even more vocal and convinced it is imminent now. My previous procedure was to take my monthly prediction of the next dividend to be paid by a leveraged ETN such as CEFL and then add the two prior months to get a projected quarterly figure. This would smooth out any “small month” – “big month” effects due to some components paying monthly and some quarterly. Then I would annualize that figure on a compounded basis. That procedure may not now be appropriate for CEFL at this point in time. The composition of the index has changed significantly. Also, adding up the February 2015, the January 2015 and the December 2015 months would a bias the yield upward since it would include the year-end special dividends paid by some of the closed-end funds. Thus, to get a better measure of the annualized compounded yield I took all of the components and determined a average monthly dividend for each including the quarterly payer EDD and those that pay monthly but did not have ex-dates in January 2015. This results in a monthly average dividend rate of $0.3147. This actually may be too conservative since it assumes there will be no special additional dividends during the entire year. Using the average monthly dividend method this results in an annual payout of $3.78 for a simple yield of 17.3% and a compounded annualized yield of 18.8% with CEFL as $21.80. Using the prior method of adding the projected $0.2721 February dividend to the two prior months would result in an annual payout of $4.69 for a simple yield of 21.5% and a compounded annualized yield of 23.8% with CEFL as $21.80. That also would be biased upwards by the year-end special dividends paid by some of the closed-end funds. See: CEFL January Dividend Gives Yield Of 23% for a listing of the CEFL components that paid special year-end dividends and a description of how the contribution to the monthly dividend from each component is calculated. If someone thought that over the next five years interest rates and economic conditions would remain relatively stable and thus CEFL would continue to yield 18.8% on a compounded basis, the return on a strategy of reinvesting all dividends would be enormous. An investment of $100,000 would be worth $236,305 in five years. More interestingly, for those investing for future income, the income from the initial $100,000 would increase from the $18,800 initial annual rate to $44,425 annually. The table below shows the price as of January 16, 2015, ex-date, pay date, dividend, imputed value and the imputed number of shares for all of the 30 CEFL components. CEFL components as of January 16, 2015 Weight Price ex-div pay date dividend frequency value $mil imputed shares dividends Alpine Global Premier Properties Fund AWP 4.51 6.76 1/21/2015 1/30/2015 0.05 Top of Form m Bottom of Form 16682549 2467833 123392 MFS Charter Income Trust MCR 4.44 8.67 1/13/2015 1/30/2015 0.05 m -.002 16423618 1894304 85244 GAMCO Global Gold Natural Resources & Income Trust GGN 4.39 7.43 3/13/2015 3/24/2015 0.07 m -.02 from2014 16238667 2185554 152989 Clough Global Opportunities Fund GLO 4.38 12.21 4/15/2015 4/30/2015 0.1 m +.005 from2014 16201677 1326919 132692 FIRST TRUST INTERMEDIATE DUR FPF 4.34 22.08 12/29/2014 1/15/2015 0.16 m ex in dec 16053716 727070 118149 MORGAN STANLEY EMERGING MARK EDD 4.32 10.57 12/17/2014 1/15/2015 0.25 q 15979736 1511801 377950 DOUBLELINE INCOME SOLUTIONS DSL 4.28 19.51 1/14/2015 1/30/2015 0.15 m 15831776 811470 121720 BLACKROCK CORPORATE HIGH YIE HYT 4.24 11.3 12/29/2014 1/9/2015 0.08 m 15683815 1387948 104790 Eaton Vance Limited Duration Income Fund EVV 4.23 14.01 1/8/2015 1/20/2015 0.1 m 15646825 1116833 113582 PRUDENTIAL GL SH DUR HI YLD GHY 4.17 16.26 2/19/2015 2/27/2015 0.13 m no ex in jan 15424884 948640 118580 PIMCO Dynamic Credit Income Fund PCI 4.09 20.35 1/8/2015 2/2/2015 0.16 m big ext paid jan 15128963 743438 116199 Western Asset Emerging Markets Debt Fund ESD 4.08 15.86 2/18/2015 2/27/2015 0.12 m 15091973 951575 109431 Eaton Vance Tax-Managed Global Diversified Equity Income Fund EXG 4.04 9.33 1/21/2015 1/30/2015 0.08 m 14944013 1601716 130220 Alpine Total Dynamic Dividend AOD 4.04 8.58 1/21/2015 1/30/2015 0.06 m 14944013 1741726 98408 ING Global Equity Dividend & Premium Opportunity Fund IGD 4.04 8.18 2/2/2015 2/17/2015 0.08 m no ex in jan 14944013 1826896 138844 Eaton Vance Tax-Managed Diversified Equity Income Fund ETY 3.75 11.13 1/21/2015 1/31/2015 0.08 m 13871299 1246298 105063 BlackRock International Growth and Income Trust BGY 3.58 6.75 1/13/2015 1/30/2015 0.05 m 13242467 1961847 96130 ABERDEEN ASIA-PAC INCOME FD FAX 3.49 5.68 1/21/2015 1/30/2015 0.04 m 12909555 2272809 79548 PRUDENTIAL SHORT DURATION HI ISD 3.32 16.37 2/19/2015 2/27/2015 0.12 m no ex in jan 12280723 750197 91899 Calamos Global Dynamic Income Fund CHW 3.2 8.64 12/29/2014 1/6/2015 0.07 m not decl 11836842 1370005 95900 MFS Multimarket Income Trust MMT 2.91 6.31 1/13/2015 1/30/2015 0.03 m 10764128 1705884 54588 BLACKSTONE/GSO STRATEGIC C BGB 2.69 16.15 2/18/2015 2/27/2015 0.11 m 9950345 616120 64693 Allianzgi Convertible & Income Fund NCV 2.52 8.84 1/8/2015 2/2/2015 0.09 m 9321513 1054470 94902 WESTERN ASSET HIGH INC FD II HIX 2.25 8.1 2/18/2015 2/27/2015 0.07 m 8322779 1027504 70898 Blackrock Multi-Sector Income BIT 1.92 17.19 12/29/2014 1/9/2015 0.12 m not decl 7102105 413153 48215 WELLS FARGO ADVANTAGE MULTI-SECTOR ERC 1.75 13.63 1/12/2015 2/2/2015 0.1 m 6473273 474928 45926 Allianzgi Convertible & Income Fund II NCZ 1.63 8.24 1/8/2015 2/2/2015 0.09 m 6029391 731722 62196 Wells Fargo Advantage Income Opportunities Fund EAD 1.35 8.8 1/12/2015 2/2/2015 0.07 m 4993668 567462 38587 Nuveen Preferred Income Opportunities Fund JPC 1.14 9.52 1/13/2015 2/2/2015 0.06 m 4216875 442949 28039 Invesco Dynamic Credit Opportunities Fund VTA 0.91 11.62 1/12/2015 1/30/2015 0.08 m 3366102 289682 21726