UBS Launches Leveraged Closed-End Fund ETF (CEFL)

by on December 13, 2013 | ETFs Mentioned:

Though U.S. equities started the week on a positive note, profit-taking pressures quickly set in following the S&P 500 index logging in its 39th record close for the year. On Monday, investors paid close attention to speeches by Federal Reserve bank presidents James Bullard and Richard Fisher, which indicated that the central bank may be ready to scale back its bond-buying purchases as early as this month. In Washington, Congress managed to reach a bipartisan budget agreement, which will provide two years of stability to fiscal policy; the deal will go to the House and Senate for approval in coming days [see The Most Successful New ETFs of 2013].

On the ETF front, Van Eck announced its conversion of the of the Market Vectors LatAm Aggregate Bond ETF (BONO) into the new Market Vectors Emerging Markets Aggregate Bond ETF (EMAG). Meanwhile, UBS added a new fund to its ETRACS lineup:

2X Leveraged Closed-End Fund DebutsLeveraged ETF

UBS launched its ETRACS Monthly Pay 2x Leveraged Closed-End Fund ETN (CEFL), which tracks the ISE High Income Index (200%). The underlying index is comprised of 30 closed-end funds (CEFs) that are ranked highest overall by the ISE in three criteria: fund yield, discount to net asset value, and liquidity. CEFL seeks to provide significant income potential with a variable monthly coupon linked to two times the cash distributions on the index constituents. Investors should note that the underlying index is reset monthly, not daily [see 101 High Yielding ETFs For Every Dividend Investor].

For those not familiar with closed-end funds (CEFs), these securities differ from mutual funds and ETFs in that they can be bought at significant discounts to the net asset value of the shares. This allows an investor to generate significantly higher levels of income, and also provides a cushion in downturns or a measure of capital appreciation in upturns.

Currently, CEFL’s top holdings include Eaton Vance Enhanced Equity Income Fund II (EOS), Eaton Vance Tax-Managed Diversified Equity Income Fund (ETY), and AllianzGI NFJ Dividend, Interest & Premium Strategy Fund (NFJ).

CEFL’s Competition

There is currently only one fund that tracks the same index as CEFL: YieldShares‘ High Income ETF (YYY), which offers non-leveraged exposure. YYY, however, charges 1.65% while its leveraged competitor CEFL charges only 0.50% [see Complete List Of New 2013 ETFs].

CEFL also joins the few closed-end fund ETFs:

  • CEF Income Composite Portfolio (PCEF, C+), which has over $454 million in AUM.
  • Market Vectors CEF Municipal Income ETF (XMPT, B), which offers investors exposure to municipal bond closed-end funds.
  • Claymore CEF GS Connect ETN (GCE), which charges 0.95%.

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Disclosure: No positions at time of writing.