Best Closed-End Funds
July 24, 2012
The volatility projections I used in my simulations have been extensively tested for a range of asset classes and are very close to the trailing three-year historical volatilities.
The 20 CEFs with the highest estimated yield-to-risk ratio are shown below. This table also shows the projected volatility for each of these funds, as well as the estimated income-only yield relative to market price. The latter is derived from CEFA’s income-only yield and my own estimate of income-only yield, for which I used 2011 income and the current price for each CEF.
Top-Ranked CEFs on the Basis of Yield vs. Risk (Net of Expenses)
These funds have the highest calculated income-only yield relative to their risk levels. For reference purposes, the projected volatility of the S&P500 is 22.5%, based on the implied volatility of long-dated options on SPY.
The average income yield of the CEFs in the table above is 8% (from the CEFA-based numbers), or perhaps 8.3%, based on my estimates using 2011 income. The average volatility for these funds is 17.7%. These results indicate that it is possible to generate income yields of 8% or more with substantially less volatility than that of the S&P 500. An equal-weighted portfolio of all 20 funds has a yield of 8% with a projected volatility of 15.1%, indicating a benefit from diversification. This portfolio has beta and R-squared (with respect to the S&P 500) of 0.48 and 53%, respectively, which shows that about half of the variance in return is driven by the systematic risk of the equity market.
To see how these CEFs compare to the broader population, the chart below compares them to the yield and risk for the broader universe of all CEFs analyzed and a high-yield bond index ETF (ticker: HYG)
CEFs with highest yield vs. risk (blue circles) vs. 70 CEFs with highest income-only yield from CEFs (red triangles) and high-yield bond index fund (HYG, green square)
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