PCEF: Hefty Expenses And Value Erosion

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Pedro Freithas/iStock via Getty Images Since my latest post on PCEF in September 2023, this ETF has gained about 14% in total return (calculated by Portfolio123), while the CEF benchmark described in ...

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In light of continued unattractive performance and updated data, I renew my \"Sell\" rating.  PCEF strategy  Invesco CEF Income Composite ETF (NYSEARCA:PCEF) started investing operations on 02/19/2010 and tracks the S-Network Composite Closed-End Fund Index. It has a portfolio of 112 CEFs (closed-end funds) and a 30-day SEC yield of 8.80%. Distributions are paid monthly. The total expense ratio is very high: 0.50% in ETF management fees and 2.58% in held fund expenses, totaling 3.08%. As described by the index provider Vettafi, eligible funds must have:  Over $100 million in capitalization value. An average premium/discount below 20% (plus or minus the average premium/discount for all universe constituents).  A management fee below 1.25% (1.5% for current constituents). Over $500k in average daily volume ($300k for current constituents).  Constituents are weighted based on net asset value and adjusted to favor funds with a discount and penalize those with a premium. Individual weights are capped at 8%, and the aggregate weight of funds weighing more than 5% is capped at 45%. The portfolio turnover rate in the most recent fiscal year was 30%.  Portfolio  The portfolio is primarily exposed to domestic common stocks (36.8% of asset value) and domestic bonds (33.4%). Additionally, some equity funds in the portfolio implement option strategies. PCEF Asset class breakdown (Chart: author; data: Fidelity) Three issuers are dominating the portfolio: BlackRock (32.5% of asset value), Eaton Vance (17%), and Nuveen (13.7%). The top 10 holdings listed below represent 30% of assets.   Ticker Weight% Name   EXG 4.33 Eaton Vance Tax-Managed Global Diversified Equity Income Fund   JPC 3.91 Nuveen Preferred & Income Opportunities Fund   BIGZ 3.16 BlackRock Innovation and Growth Term Trust   BMEZ 3.16 BlackRock Health Sciences Term Trust   BSTZ 2.76 BlackRock Science and Technology Term Trust   ECAT 2.63 BlackRock ESG Capital Allocation Term Trust   BCAT 2.61 BlackRock Capital Allocation Term Trust   BDJ 2.58 BlackRock Enhanced Equity Dividend Fund   ETY 2.56 Eaton Vance Tax-Managed Diversified Equity Income Fund   ETV 2.33 Eaton Vance Tax-Managed Buy-Write Opportunities Fund   Click to enlarge Closed-end funds are often chosen by investors for their distribution yield. They also have metrics that are not applicable to stocks and ETFs. Two of them are more important than the yield:  Discount to NAV (higher is better). Relative discount = Discount to NAV minus its 12-month average (higher is better).  The next table compares PCEF holdings with the full CEF universe regarding these metrics. Out of 112 funds in the portfolio, 95 with available data have been taken into account in the calculation (representing 79% of asset value).     Average discount% Average relative discount%   PCEF 7.32 -0.89   CEF universe 8.25 -1.52   Click to enlarge Calculation using Portfolio123 The sample's average discount is slightly inferior to the universe's average discount, which is a bad point. However, the relative premium is marginally lower. Performance Equity and bond benchmarks are not appropriate for closed-end funds. The next table compares PCEF since inception with a subset of the closed-end fund universe: the 125 CEFs with higher yields among those with an average trading volume above $100k/day and a positive discount to net asset value. To make it comparable with a passive index, the subset is reconstituted in equal weights every quarter.     Total Return Annual Return Drawdown Sharpe ratio Volatility   PCEF 134.48% 6.09% -38.64% 0.46 11.94%   Reference subset 196.25% 7.83% -46.22% 0.51 14.73%   Click to enlarge Past performance is not a guarantee of future returns. Data Source: Portfolio123 This benchmark is much simpler than the PCEF underlying index and beats it by 1.7% in annualized return. However, it shows a higher risk of drawdown and volatility. A note of caution: the fund's return is real, whereas the subset is simulated. As reported on the next chart, the share price has lost 25.6% since inception. To make it worse, the cumulative inflation at the same time was about 44% (based on CPI). PCEF share price history (Seeking Alpha) The annual sum of distributions has lost 11% between 2013 and 2023, from $1.98 to $1.77 per share. In the same period, the cumulative inflation was about 32%. The fund has suffered a decay not only in value, but also in income stream. PCEF distribution history (Seeking Alpha) Competitors The next chart compares the total returns of PCEF and two other ETFs of CEFs:  Amplify High Income ETF (YYY). Saba Closed-End Funds ETF (CEFS).  The chart starts on 3/27/2017 to match inception dates. PCEF beats YYY, but CEFS is the best performer with a significant margin. PCEF vs YYY, CEFS since 3/27/2017 (Seeking Alpha) Over the last 12 months, CEFS has outperformed PCEF by almost 10%: PCEF vs YYY, CEFS 12-month return (Seeking Alpha) Takeaway  Invesco CEF Income Composite ETF constructs a portfolio of closed-end funds by eliminating the smaller, less liquid, and most overpriced ones. Its total expense ratio is about 3%, and its aggregate discount is not very attractive. PCEF has lagged a simple CEF benchmark since its inception and its competitor CEFS since March 2017. Moreover, price and distribution have been on a downtrend for years, resulting in shareholders in a steep inflation-adjusted decay in both capital and income. PCEF may be useful as a trading instrument to capture some market anomalies, but it looks quite unattractive as a long-term investment.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2454032210"}