Read also part one of the article here.
Last week I introduced the idea of using SPDR sector and Index ETFs for insight into what’s working and what’s not working while market breadth continues to narrow. We looked at index ETFs and Health Care CEFs. Here are the ten SPDR sector ETFs and three index ETFs updated with Friday’s closing prices.
For this past week all sector and index ETFs lost ground. Telecom (XTL) and Dow 30 (DIA) slipped to negative YTD. Health Care is now the only SPDR sector ETF with double digit Share TR at 10.1% although it too gave up 2.6 pts versus last week.
Looking at Equity CEFs
This week I am looking at the EV U.S. Equity CEFs with an eye on three portfolio metrics, and one balance sheet metric:
1) Percent of portfolio holdings in top two performing sectors
2) Percent of portfolio holdings in bottom two performing sectors
3) Net unrealized capital gains or losses as a percentage of net assets
4) The top sector weighting in the portfolio
I am interested in which portfolio managers are best positioned in the top two sectors, best avoid the bottom two sectors, how well their prior stock picking has shown up on the balance sheet as net unrealized capital gains, and what is the top sector in their portfolios. Note: I own several EV CEFs. In the charts my positions are highlighted in green.
My scoring system is simple. For each criteria if the fund has the best result that is one point, second best two points, and so on. I then sum the points for each fund and the lowest total is highest ranked. OK, with that said lets first look at historical NAV TR for each of the past three years and YTD. This left side of this chart shows NAV TR for each time period and cumulative since 1/1/2012. The right side shows the scored ranking with EOS on top and ETJ on the bottom.
That is a look at historical performance. Next, I want to see which funds are best positioned for the future based on the sector ETFs than are working now. This first chart shows the total portfolio holdings for the top two sectors (Health Care and Consumer Discretionary), the bottom two sectors (Utilities and Energy), the top sector held and its percentage of the total portfolio.
I do not score the top sector held but I do consider it subjectively. For instance, six of these funds have IT as the top sector held. I have a favorable opinion if the IT holdings are mostly the NASDAQ 100. QQQ, the proxy ETF, is up 8.7% Share TR YTD.
Note that only ETG, ETO, and EVT have combined Health and Consumer Discretionary holdings less than their top sector. Looking at the weighting of Utilities and Energy, EVT, ETO and ETW have, IMHO, too much exposure to these lowest performing sectors. I continue to hold EVT because of its outsized position in financials. When the FED begins raising interest rates and yield spread begins to widen then financials should do very well.
The chart also shows net unrealized capital gains as a percentage of net assets. I consider this ratio an indication of how good the portfolio managers have been at picking stocks that are working and how much of the capital gains have had to be used to pay regular distributions. The larger the percentage the better.
This final chart then shows the rankings based on the scoring of these predictive metrics.
Remember the lower the Final Rank number the better. The outlier seems to be ETJ which has the third best ranking here but ranks last in the historical NAV TR metrics. I know that ETJ has lagged because of its put options strategy which does best in down markets. I am going to take a closer look at the evolution of its portfolio over the past couple of years. If ETJ is repositioning its portfolio into sectors that are working or is changing their options strategy then I may take a position.
Make it a great week!
Originally published in DividendLab Newsletter, 10-Aug-15 issue.