The breadth of the stock market continues to narrow with more equities declining than advancing. The FED is promising to wean us off of historically low interest rates which, up until recently, has acted as a put underneath the market throughout the bull run since 2009. While producing healthy equity returns since then, at best, we have had only so-so GDP growth of 2.0% – 2.5%. Q2 earnings reports have been OK on earnings but lousy on revenue growth.

What is needed now to broaden and propel the markets is more economic growth throughout the world. However, the commodities used to make things are not signaling worldwide demand growth. In fact, it is just the opposite. I realize the FED does not talk much about deflation but if this isn’t deflation what is?

One way to look at this narrowing of the market is through the YTD performance of SPDR sector ETFs. One of my investing fundamentals is to know what I am buying. In part, that means looking for equity investments with a higher portfolio concentration in the sectors that are working. Here are the ten SPDR sector ETFs and the index ETFs for the NASDAQ, Dow 30 and S&P 500 sorted by YTD Share Total Performance (TR).

Six of the ten sector ETFs have a positive YTD Share TR but only Health Care and Consumer Discretionary are providing double digit returns. Interesting that the NASDAQ 100 index ETF, QQQ, is up 8.9% versus the technology SPDR, XLK, which is only up 3.9%. The Dow Index SPDR, DIA is barely hanging in with a positive TR for the year.

But I still Need Reliable Investment Income!

Not the best picture but even with that backdrop I still need to manage the risk to my investment income and try to position in CEFs with appropriate portfolio weighting in sectors I think will work into the future. First, I look at how my CEF Share TR is doing versus the sector and index benchmarks. Then, I want to look at the most recent SEC filings for the CEFs which, I think, provide the best portfolio weighting in sectors that are working or that I think will start working. The best CEFs are those that beat the comparable industry benchmarks, pay a nice dividend and are available at a decent discount (value) to the underlying NAV.

Previously, I have mentioned that I own several index CEFs because I consider them to be defensive based on the various options strategies they employ. The following chart is a comparison of SPXX and BXMX, which I own, to the S&P 500 index ETF (SPY). Both SPXX and BXMX offer a healthy annual yield without using leverage. They use options strategies to boost income and, theoretically, reduce volatility compared to the index (SPY). BXMX trades right at its 3 year average discount while SPXX discount is 1.5 points greater, more value, than the average.

However, the two CEFs have not produced equivalent YTD Share Total Returns (TR). In fact, SPXX is running behind SPY in TR. BXMX is handily beating both SPXX and SPY with YTD TR of 12.9%.

One explanation is that BXMX sells index call options on up to 100% of portfolio value while SPXX limits options to 35% to 75%. So when they get it right, which they are these days, BXMX produces more income from the options strategy. These are index vehicles so there isn’t much difference in the underlying portfolios. It is interesting that the second largest holding for SPXX is SPY. The fourth largest holding for BXMX is Berkshire B shares and the fifth largest for SPY is Wells Fargo. The other top five holdings are the same for each. Note: SPXX and BXMX are both Nuveen funds however they have different portfolio managers. In terms of managing my CEF portfolio this call is pretty easy, reallocaate my SPXX investment to BXMX.

Here is a chart comparing QQQX which theoretically mimics the NASDAQ 100, to the sector ETF QQQ, and DIAX to its sector counterpart DIA (DOW 30). I own both CEFs.

Here again the CEF advantage to produce more income than the SPDR ETF is clear. Both QQQX at 7.3% and DIAX at 6.9% utilize options and offer nice yields. However, do they also produce superior TR? In the case of QQQX the answer is definitely not as QQQ more than doubles the TR of QQQX. For DIAX it is essentially a push with DIA. Both QQQX and DIAX are trading at historic value with discounts that provide 6.3 and 3.8 points more discount than the 3 year average. I recently posted on the DL forum about the relative underperformance of QQQX and that I had reduced my position by half. My concern wasn’t the sustainability of the distribution but that there was too much variance in TR performance relative to its benchmark.

What about Non-Index Funds?

The top performing SPDR sector is health care (XLV) with YTD Share TR of 12.7%. Here is the chart comparing three of my healthcare CEFs with the sector ETF. I also own THQ but did not include it in this analysis because of its short history.

GRX has the most diversified portfolio by far and that may be a part of why it has lagged in TR. Its portfolio is only 59% in health care while XLF, HQH and HQL are at 99%. None of these CEFs are trading at historical value in terms of discount. GRX has a smaller distribution yield of 4% compared to 7%+ for HQH and HQL. Note that the YTD Share TR for XLV, the Health sector ETF, is greater than GRX but considerable less than HQH or HQL. GRX utilizes leverage (21.7%) which should give it an advantage over XLY. Neither, HQH nor HQL utilize leverage to boost income. I have reduced my GRX position by half. I have allocated part of the proceeds to THQ. Tekla Advisors has another heath fund, THW, and after the IPO premium bleeds off I will go long this new CEF.


Keeping an eye on the performance of the ten SPDR sector ETFs and the Index ETFs is an easy and informative way to understand what’s working and what’s not working. See first chart. When everything, or almost everything, is working it is relatively easy to make investment gains. However, as the market breadth narrows, which it is now, the need for a deeper portfolio analysis and its maintenance is much more important.

Next week I will provide this same analysis for other equity CEFs that I own. If you have a CEF you would like included in the analysis drop me an email at

Make it a great week!

Tom Mays

 Originally published in DividendLab Newsletter, 03-Aug-15 issue.
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