ETY：90/10股票/债券指数基金分拆让投资者受益匪浅

ETY is a closed end fund focused on dividend stocks and equity income.

True to its name the fund is diversified.

The fund\'s dividend yield is roughly in line with the S&P 500.

The fund\'s covered call strategy doesn\'t appear to yield much benefit.

The Eaton Vance Tax-Managed Diversified Equity Income Fund (ETY) is a closed end fund whose “primary investment objective is to provide current income and gains, with a secondary objective of capital appreciation. Strategy The Fund invests in a diversified portfolio of domestic and foreign common stocks with an emphasis on dividend-paying stocks and writes (sells) S&P 500 Index call options with respect to a portion of the value of its common stock portfolio to generate current cash flow from the options premium received.”

If you’ve been reading our articles, you won’t be surprised that our overall opinion of this fund is negative. However, we want to address a common reader question on why we are negative on most of the fund’s we write about. The answer is simple, a vast majority of actively managed funds underperform low cost “passive” benchmarks (we say passive in quotes because some may be active e.g. DJIA). Depending on what studies you look at somewhere around 50% to 70% of funds underperform in any given year and once you look out a decade or two, the underperformance rate is somewhere in the 90% range or higher. With so few funds outperforming, you can expect us to be extremely judicious in writing positive reviews.

Let’s start off with what’s good about ETY first. The fund includes the word “diversified” in its title and with 50 holdings, I think that would qualify as diversified. While one stock, Microsoft (MSFT), has a weighting of over 5%, it’s also currently the largest company by market cap and has an approximate 4.4% weighting in the S&P 500 index so the fund is only overweight by about 1%. The fund is also nicely diversified by sector as well.

(Graphic source: Morningstar)

So, ETY passes the first part of the fund title and description test. Now what about being focused on dividends?

Looking at the fund’s latest annual report and dividing dividend income less foreign withholding taxes (which are minimal since the fund primarily invests in domestic companies) by ending assets we get a dividend yield of approximately 1.8%. That is about the same as the S&P 500’s current dividend yield of around 1.9%.

Browsing the fund’s fiscal year-end holdings we see many stocks that either don’t pay a dividend or pay a very small dividend. Some of the fund’s holdings include Live Nation (LYV), Spotify (SPOT), Alphabet (GOOG) (NASDAQ:GOOGL), GoDaddy (GDDY), Visa (V), and Amazon (NASDAQ:AMZN). We aren’t saying these are bad stocks to own. If you look at the disclosure at the end of this article you’ll see we own a fair number of them. It is just hard to see how they fit in with a strategy that is focused on dividends and income.

The final part of the fund's strategy is selling covered calls to increase income with about 48% of the portfolio having call options written on it. While there is some academic evidence that covered call writing can be a worthwhile strategy, too often we see the strategy end up not providing much downside protection (income from call options is supposed to cushion a fund's downside) while severely limiting upside participation (winning stocks are called away).

(Graphic source: Morningstar)

We can see that over the last decade, the fund captured almost 92% of the market’s downside while only participating in about 80% of its upside. It also hasn’t done much to help investors in down or flat years. In 2011, the fund lost -3.66% compared to the positive 2.11% return for the S&P 500. In 2018, the fund basically matched the market, dropping 4.77% compared to 4.38% for the S&P 500.

If you look at volatility metrics, you do indeed see the fund is less volatile than the S&P 500.

(Graphic source: Morningstar)

However, returns are quite a bit lower because of the skewed downside/upside capture ratios. So investors aren’t being appropriately rewarded.

We don’t really see any reason why investors should pay 1.07% in annual expenses for this fund over a low-cost S&P 500 index fund. If investors are looking for less volatility, you can simply do a 90/10 stock/bond split and get roughly the same volatility with significantly more upside capture.

I am/we are long V, GOOGL, AMZN, MSFT.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.