ETG: Discount Widening Further Presents A Better Opportunity For Entry

Darren415

Written by Nick Ackerman, co-produced by Stanford Chemist. A type of this article was primitively published to members of nan CEF/ETF Income Laboratory connected February 10th, 2023.

Eaton Vance Tax-Advantaged Global Dividend Income Fund (NYSE:ETG) has moved to a wider discount than erstwhile we past took a look astatine nan fund. At that time, nan chat focused connected nan fund's distribution cut. As an equity fund, a carnivore marketplace doesn't mostly output awesome results. Thus, nan 2nd distribution trim successful this fund's history happened. However, astatine that time, nan discount was still reasonably narrow. Now we've seen that widen retired to a much compelling level.

Additionally, since that erstwhile update, nan money has been performing rather well. More recently, volatility has picked backmost up for equities, but location still was immoderate rebounding since our past update. While nan S&P 500 Index isn't a nonstop benchmark, it tin beryllium utilized arsenic a measurement to supply immoderate discourse of nan wide market. ETG has outperformed nan broader marketplace since that clip connected a full return basis.

ETG Performance Since Prior Update (Seeking Alpha)

These returns bespeak nan stock price, but since we cognize nan discount has widened further, it suggests that nan fund's underlying portfolio aliases NAV has performed moreover better. Equities are still susceptible to volatility arsenic we participate into a twelvemonth that is anticipated to see a recession. Being a leveraged fund, that intends we will spot moreover much amplified moves, whether up aliases down. However, considering a position astatine today's discount could beryllium a compelling action for a semipermanent investor.

The Basics

• 1-Year Z-score: -1.08
• Discount: -7.54%
• Distribution Yield: 7.48%
• Expense Ratio: 1.14%
• Leverage: 22.7%
• Managed Assets: $1.63 billion
• Structure: Perpetual

ETG invests "primarily successful world dividend-paying communal and preferred stocks and seeks to administer a precocious level of dividend income that qualifies for favorable national income taxation treatment." This intends they are looking for companies whose dividends are considered to beryllium qualified dividend income. Of course, that is bully for investors who mightiness clasp this successful a taxable account. It would trim nan taxation responsibility for an investor, which is wherever nan "tax-advantaged" information of its sanction comes from.

The money is moderated leveraged, but that still doesn't mean it avoids nan modular consequence pinch leverage being much volatile. Any leverage will summation downside potential, arsenic good arsenic upside potential.

On apical of this, pinch rising liking rates, leverage costs person been skyrocketing. They salary an liking complaint of 1 period LIBOR positive 0.50%. At nan extremity of nan fiscal twelvemonth 2022, nan complaint was 3.80%. Their fiscal twelvemonth ends successful October. Since then, liking rates person only gone higher, and therefore, nan costs of their leverage has only further increased. The fund's full disbursal ratio came to 1.58% erstwhile including leverage expenses.

Performance - Tough 2022, Strong Track Record

The money mostly operates a beautiful straightforward portfolio of investing successful equity and indebtedness positions without employing derivatives. Perhaps a bully logic to instrumentality to that is included successful nan latest annual report, they employed futures contracts, and it was a detractor from performance. The contracts really mislaid nan money money done nan twelvemonth but were an effort to hedge against European equity exposure.

The Fund's usage of equity scale futures contracts, a type of derivative, was a insignificant detractor from capacity comparative to nan Index. Within nan Fund's communal banal portfolio, nan Fund's strategy of emphasizing dividend-paying stocks resulted successful an overweight allocation to European equities and an underweight allocation to U.S. equities. The Fund hedged these overweight and underweight exposures by short-selling European scale futures contracts and buying U.S. scale futures contracts. Both nan European and U.S. scale futures contracts were nary longer successful effect arsenic of period-end.

Along pinch that, nan overseas rate transactions besides contributed to immoderate losses for nan fund.

ETG Derivative Losses (Eaton Vance)

That being said, complete nan longer term, nan money has put up stronger aliases much competitory results compared to nan benchmark it includes for comparisons.

ETG Annualized Returns Compared To Benchmarks (Eaton Vance)

Important to statement that nan clip these performances were presented was astatine nan extremity of October. That's erstwhile nan money was really trading astatine a premium. Since then, we've seen a discount unfastened backmost up. Traditionally, this money has traded astatine a discount, truthful buying astatine a premium isn't suggested. We are now trading somewhat beneath nan longer-term mean discount.

That would bespeak a clip that 1 could see entering a position. Perhaps not nan top clip aliases a "back up nan truck" moment, but a clip to see a dollar-cost mean approach. The marketplace turning weaker wide again is helping to coming a little stock value too.

Data by YCharts

Distribution - NII Coverage Falls

This money has been a dependable payer since nan GFC. They past raised astatine nan extremity of 2021 erstwhile everything was rallying. Unfortunately, that was conscionable earlier nan carnivore marketplace of 2022.

ETG Distribution History (CEFConnect)

One of nan causes for nan distribution trim could beryllium attributed to a large displacement successful nan fund's nett finance income. In 2019, the NII coverage was astir 100%.

For an equity fund, that is incredibly uncommon and practically unheard of. However, nan inclination of beardown NII has travel down since that time. The latest NII sum for 2022 comes to conscionable 32.5%. A driblet from 63% successful nan anterior year.

Some of this diminution is simply from rising leverage costs. Last year's borrowings costs them $2.325 million. Fiscal 2022's leverage expenses came to a whopping $6.4 million, pinch only much to spell for fiscal 2023.

ETG Annual Report (Eaton Vance)

Going forward, they would beryllium paying retired astir $91.843 million, factoring successful nan distribution cut. NII sum based connected nan latest NII number would beryllium 42.1%, but we cognize pinch expanding leverage costs, it will beryllium lower.

For taxation purposes, nan money shows a breakdown of mean income and semipermanent realized superior gains. This is reasonably modular for nan fund.

ETG Distribution Tax Classification (Eaton Vance)

The tax-advantaged portion is nan semipermanent superior gains being taxed much favorably. Additionally, 100% of 2021's distribution that was identified arsenic mean income was considered qualified dividends. Meaning that those, too, were tax-advantaged astatine a little comparative complaint than mean income.

ETG's Portfolio

The benignant of alteration we spot successful NII doesn't travel from a stagnant portfolio. Most of what ETG invests successful mostly raises its dividends annually. That would mean we could expect to spot NII increases thief antagonistic higher expenses done leverage. Since that isn't nan case, we cognize that location is simply a displacement successful underlying portfolio holdings toward lower-yielding stocks.

As an actively managed fund, ETG is connected nan much progressive side. The latest twelvemonth showed a portfolio turnover of 59%. That was really nan lowest successful nan past 5 years, arsenic it was arsenic precocious arsenic 224% successful 2020.

One displacement that has taken spot is tech becoming nan largest weighting. This was nan position astatine nan extremity of October 2022.

ETG Asset Allocation (Eaton Vance)

At nan extremity of April 2022, financials were nan largest weighting successful nan fund. Although not an overly melodramatic shift, nan weightings had financials astatine 19.3% and tech astatine 17.1%. However, it tin still explicate immoderate of nan shifts successful nan yields nan money has been capable to achieve.

Overall, nan portfolio has gone a spot heavier into equity positions. The money is mostly overweight equity positions but was antecedently astatine 85.58%. Here's nan plus operation astatine nan extremity of December 2022. Exposure to fixed income decreased crossed each type of sector, investment-grade, high-yield, preferreds and convertibles. That could beryllium different facet successful why we spot a simplification successful yields generated successful nan portfolio.

ETG Asset Mix (Eaton Vance)

All that being said, nan money has mostly carried vulnerability to large-cap tech names. Microsoft (MSFT), Alphabet (GOOG), Apple (AAPL) and Amazon (AMZN) person each been reasonably regular names successful immoderate weighting aliases different for this fund. Interestingly, erstwhile comparing nan apical 10 holdings astatine nan extremity of December 2022 comparative to September 2022, we've seen AAPL and AMZN driblet successful their position successful nan apical 10 done a diminution successful nan weightings of nett assets.

ETG Top Ten Holdings (Eaton Vance)

AAPL was successful nan 4th largest position pinch 3.23% weighting. AMZN was successful nan 3rd largest position pinch a 3.28% allocation but is now hardly successful nan apical 10 astatine nan tenth spot. This besides defers nan apical 10 holdings listed successful nan fund's yearly report. So, what this could propose is that they've shifted erstwhile again distant from tech successful nan past mates of months of nan year.

That being said, pinch normal portfolio shifts during this time, it could besides beryllium playing a large role. AMZN and AAPL were nan worst performing by acold successful nan past mates of months of 2022 comparative to nan different apical 10 names.

Ycharts

On nan different hand, fixed really precocious nan turnover for this portfolio is, it wouldn't beryllium excessively shocking to spot a alteration successful specified a short play of time, either. However, that comes pinch different point to see for investors. It puts america arsenic investors successful a spot of an chartless of knowing precisely what we mightiness beryllium holding astatine immoderate fixed time. When costs are managed pinch a much fierce turnover, we trust much connected management. Trusting Eaton Vance managers, successful this case, has historically paid off.

For me, I preferred nan fund's overweight to financials aliases different worth sectors specified arsenic healthcare and little accent connected tech holdings. I wouldn't kick if nan money went backmost to much of that positioning. If that is nan case, we could spot nan money make higher yields and NII from nan portfolio to thief offset nan increases successful its leverage costs.

Conclusion

ETG's discount continues to widen aft nan distribution trim past year. While this was expected, nan money took immoderate clip to scope this much charismatic introduction level. We are now trading beneath nan fund's semipermanent humanities mean discount. At nan aforesaid time, we still aren't astatine a heavy capable discount to spell overboard. Utilizing a much cautious dollar-cost mean attack could beryllium due for a semipermanent investor.

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