2016 Mid-Year Update For 20%-Yielding CEFL: Outperformance But Distributions Declining

Published Thu, 19 May 2016 08:42:16 -0400 on Seeking Alpha

The 20%-yielding UBS ETRACS Monthly Pay 2xLeveraged Closed-End Fund ETN (NYSEARCA: CEFL) is quietly having a strong 2016 thus far. This 2x leveraged fund-of-CEFs has returned +16.28% year-to-date, while its unleveraged counterpart, the YieldShares High Income ETF (NYSEARCA: YYY), has gained +7.95%. The PowerShares CEF Income Composite ETF (NYSEARCA: PCEF), a basket of CEFs that tracks a different index to CEFL/YYY, returned 5.80%. In comparison, U.S. high-yield bonds (NYSEARCA: JNK) have rallied by +5.40% while the U.S. market (NYSEARCA: SPY) lingers at +1.00%.

This outperformance could most likely be attributed to a recovery in risk appetite after the market downturns in February and early March of this year. Professor Lance Brofman has recently calculated CEFL's discount to be -9.24% on Apr. 18, 2016, up from -12.43% in Feb. 24, 2016. A combination of narrowing discounts and sustained rallying of high-yield bond funds (coupled with CEFL's 2x leverage) allowed this ETN to put in a strong performance for 2016 thus far.
Portfolio changes
As described in "An Unexpectedly Tame Rebalancing For CEFL And YYY", this year's annual rebalancing in the index upon which CEFL and YYY are based, the ISE High Income Index [YLDA], was surprisingly tame. It appeared to me that the index providers exercised discretion in their choice of the funds to be added and removed rather than follow their published methodology, possibly as a method to prevent the... Read more