April 25, 2012 Alternative Fixed Income ETFs: It’s the Yield, Stupid!
April 25, 2012
Alternative Fixed Income ETFs: It’s the Yield, Stupid!
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S-Network Composite Closed-End Fund Index
3 © 2012 S-Network Global Indexes LLC., 267 Fifth Avenue, New York, NY 10016.
Index Overview
CEFX Provides Diversified Exposure to a Broad Range of High Quality Closed-End Funds.
A Diversified Portfolio of 126 Closed-End Funds Targets Yield
Investment Grade Fixed Income Funds High Yield Fixed Income Funds Option Income Funds
All US-Registered
Modified Net Assets-Weighted
Multiple Qualitative Screens
Discount Expense Ratio
Screened for Liquidity
Designed to Take Advantage of Inefficiencies in the Closed-End Fund Market
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Closed-End Fund Overview – Key Features
Diversification Professional Management Efficient Portfolio Management Periodic Distributions
Pass Through Taxation
Opportunity to Buy at a Discount
Leverage Potential
Lower Expense Ratios
Closed-End Funds – a $224 Billion Investment Class – Offer Investors a Number of Key Benefits That Are Incorporated into CEFX.
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Index Composition
Investment Grade Fixed Income Funds Hold government and corporate bonds, mortgage backed securities, and preferred stock Some funds may concentrate on one particular debt instrument, various forms of debt securities or international fixed-income securities in developed and emerging markets
High Yield Fixed Income Funds
Hold portfolios of corporate bonds with ratings below investment grade Bank loan funds hold senior bank loans of companies with bond ratings below investment grade Some funds have allocations to non-US government and corporate issuers
Option Income Funds
Invest in portfolios of common stocks and write-call options on those stocks or comparable indexes Attractive to investors seeking higher income and lower volatility Actively managed to produce favorable taxation
CEFX Includes Three Types of Closed-End Funds that Provide Diversification, Yield, Discount, and Some Tax Advantages.
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Index Rationale
CEFX Substantially Diminishes the Risks Implied in Owning a Single Closed-End Fund, While Providing High Current Yields and Discounts.
Diversification by Asset Class Diversification by Investment Strategy
Diversification by Manager
High Current Yield
High Current Discount to NAV
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Index Rationale – Diversified Assets
CEFX Diversifies Risk by Including Closed-End Funds that Hold Differing Asset Classes and Employ Differing Investment Strategies.
Source: Bloomberg, as of 30/30/2012
Option Income 38.40%
Investment Grade Fixed Income
42.13%
High Yield Fixed Income 19.47%
S-Network Composite Closed-End Fund Index: Sector Breakdown
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Index Rationale – Diversified Strategies
CEFX Also Diversifies Risk by Manager and Includes the Leading Fixed Income Managers in the US.
Source: Bloomberg, as of 3/30/2012
Eaton Vance Management
21.60%
BlackRock Advisors Inc 19.25%
Nuveen Asset Management
14.41% AllianceBernstein LP 5.14%
ING Investments LLC 4.60%
PA Fund Management LLC
4.08%
Legg Mason Partners Fund Advisor LLC
3.84%
Massachusetts Financial Services Co
2.71%
Aberdeen Closed End Funds 2.27%
Other 22.10%
S-Network Composite Closed-End Fund Index: Manager Breakdown
9 © 2012 S-Network Global Indexes LLC., 267 Fifth Avenue, New York, NY 10016.
Index Rationale – Yield
With a Current Yield of 8.93%, CEFX Indicates a Higher Yield than Most Other Classes of Fixed Income Investments, Including Government and Corporate Bonds.
Source: Bloomberg, as of 3/30/2012
0.19%
1.61% 2.23%
0.72%
1.68%
3.29%
8.93%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
9.00%
10.00%
1-Year USTreasury
7-Year USTreasury
10-Year USTreasury
2-YearCorporate AA
5-YearCorporate AA
10-YearCorporate AA
CEFX
Current Yields
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Index Rationale – Discount
CEFX’s Current Market Value Trades at a Discount to Net Asset Value of -4.95%, Indicating Significant Undervaluation.
Source: Bloomberg, as of 3/30/2012
-8.42%
-3.66%
1.20%
-1.27%
-8.55%
-5.91%
-9.73%
-4.35% -3.75% -4.09%
-5.04%
-3.88%
-6.74% -6.47%
-4.95%
-12.00%
-10.00%
-8.00%
-6.00%
-4.00%
-2.00%
0.00%
2.00%Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Sep-11 Dec-11 Mar-12
S-Network Composite Closed-End Fund Index: Discount
11 © 2012 S-Network Global Indexes LLC., 267 Fifth Avenue, New York, NY 10016.
Index Construction - Weighting
CEFX’s Unique Weighting Methodology Accords Higher Weights to Closed-End Funds that Trade at Discounts.
Weights Based on Net Assets Net Assets Adjusted for Premium/Discount
Increases in Fund Net Assets for Funds Trading at a Discount*
Discount > 6% = 30% Increase in Net Assets Discount > 3% and < 6% = 20% Increase in Net Assets Discount > 0% and < 3% = 10% Increase in Net Assets
Decreases in Fund Net Assets for Funds Trading at a Premium*
Premium > 6% = 30% Decrease in Net Assets Premium > 3% and < 6% = 20% Decrease in Net Assets Premium > 0% and < 3% = 10% Decrease
Stocks Capped at 8% Index Weight
Combined Weight of Stocks with Weights over 5% Capped at 45%
*Discount/Premium +/- Average Discount/Premium of Indicated Funds
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Summary – Index Features and Benefits
CEFX Offers Multiple Forms of Diversification that Help Diminish Specific Risks, while Providing High Current Yield and High Current Discount.
Feature Benefit
Asset Diversification
Index constituents hold various types of assets, including government bonds, corporate bonds, emerging market bonds, high yield bonds, equities and options.
Strategy Diversification Index constituents employ a wide range of trading strategies that diversify specific fund risk.
Manager Diversification Constituent closed-end funds employ over 35 different managers, including some of the leading fixed income managers in the world.
High Current Yield At 8.93%, the CEFX offers yields substantially higher than most fixed income investments.
High Current Discount At -4.95%, the CEFX currently trades at an historically low valuation – exceeded only in times of severe market disruption.
13 © 2012 S-Network Global Indexes LLC., 267 Fifth Avenue, New York, NY 10016.
S-Network Municipal Bond Closed-End Fund Index
14 © 2012 S-Network Global Indexes LLC., 267 Fifth Avenue, New York, NY 10016.
Index Overview
CEFMX Provides Diversified Exposure to a Broad Range of High Quality Municipal Bond Closed-End Funds.
A Diversified Portfolio of 81 Municipal Bond Closed-End Funds Targets Federal Income Tax Exempt Yield
All US-Registered Funds
Modified Net Asset-Weighted Methodology Multiple Qualitative Screens
Discount Expense Ratio
Screened for Liquidity
Designed to Take Advantage of Inefficiencies in the Closed-End Fund Market
15 © 2012 S-Network Global Indexes LLC., 267 Fifth Avenue, New York, NY 10016.
Key Features
Diversification Professional Management Efficient Portfolio Management Periodic Distributions
Yield Exempt From Federal Income Taxes
Opportunity to Buy at a Discount
Leverage Potential
Lower Expense Ratios
CEFMX Provides an Effective Benchmark for US Municipal Bond Closed-End Funds.
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Index Rationale
CEFMX Substantially Diminishes the Risks Implied in Owning a Single Municipal Bond Closed-End Fund While Providing High Current Yields Tax Free.
Diversification by Asset Class Diversification by Investment Strategy
Diversification by Manager
High Current Yield
Yield Exempt From Federal Income Taxes
High Current Discount to NAV
17 © 2012 S-Network Global Indexes LLC., 267 Fifth Avenue, New York, NY 10016.
Index Rationale – Sector Breakdown
CEFMX Diversifies Risk by Including Municipal Bond Closed-End Funds that Employ Differing Investment Strategies and Use Different Levels of Leverage to Increase Yield .
Source: Bloomberg, as of 3/30/2012
Leveraged 85.30%
Unleveraged 8.24%
Leveraged High Yield 3.71%
Unleveraged High Yield 2.75%
S-Network Municipal Bond Closed-End Fund Index: Sector Breakdown
18 © 2012 S-Network Global Indexes LLC., 267 Fifth Avenue, New York, NY 10016.
Index Rationale – Manager Breakdown
CEFMX Also Diversifies Risk by Manager and Includes the Leading Fixed Income Closed-End Fund Managers in the US.
Source: Bloomberg, as of 3/30/2012
Nuveen Funds 45.42%
BlackRock Funds 23.78%
Van Kampen Funds 10.78%
Eaton Vance Funds 3.37%
Putnam Funds 3.05%
Western Asset Trust Closed End
2.93%
Allianz Funds 2.67%
Dreyfus Funds 2.52%
DWS Investments 1.29%
Alliance Funds 1.22%
Pioneer Funds 1.11%
MFS Funds 1.15%
Neuberger Berman Funds- 0.72%
S-Network Municipal Bond Closed-End Fund Index: Manager Breakdown
19 © 2012 S-Network Global Indexes LLC., 267 Fifth Avenue, New York, NY 10016.
Index Rationale – Yield
With a Current Yield of 6.16%, CEFMX Indicates a Higher Yield Tax Free than Most Other Classes of Fixed Income Investments, Including Government and Corporate Bonds.
Source: Bloomberg, as of 3/30/2012 *Based on Marginal Tax Rate of 35%
0.19%
1.61% 2.23%
0.72%
1.68%
3.29% 3.26%
6.16%
0.19%
1.61% 2.23%
0.72%
1.68%
3.29%
5.02%
9.48%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
9.00%
10.00%
1-Year USTreasury
7-Year USTreasury
10-Year USTreasury
2-YearCorporate AA
5-YearCorporate AA
10-YearCorporate AA
S&P Nat AMT-Free Muni
Bond IndexTR
S-NetworkMunicipal
Bond Closed-End Fund
Index
Current Yields
Current Yield Tax Equivalent Yield*
20 © 2012 S-Network Global Indexes LLC., 267 Fifth Avenue, New York, NY 10016.
Index Rationale – Discount
CEFMX’s Current Market Value Trades at a Discount to Net Asset Value of -0.58%, Indicating Undervaluation.
Source: Bloomberg, as of 3/30/2012
-5.58% -4.33%
-6.06% -4.30%
-3.81% -2.37%
-2.55% -5.13%
-8.82%
-5.76% -4.18%
-8.29%
-17.69%
-7.69%
-4.71%
-2.05% -2.21%
-1.38%
0.31%
2.75%
-3.25%
0.55%
-1.20% -1.25%
1.61%
-0.58%
-20.00%
-15.00%
-10.00%
-5.00%
0.00%
5.00%
S-Network Municipal Bond Closed-End Fund Index: Discount
21 © 2012 S-Network Global Indexes LLC., 267 Fifth Avenue, New York, NY 10016.
Index Construction - Weighting
CEFMX’s Unique Weighting Methodology Accords Higher Weights to Municipal Bond Closed-End Funds that Trade at Discounts.
*Discount/Premium +/- Average Discount/Premium of Indicated Funds
Weights Based on Net Assets Net Assets Adjusted for Premium/Discount
Increases in Fund Net Assets for Funds Trading at a Discount*
Discount > 6% = 30% Increase in Net Assets Discount > 3% and < 6% = 20% Increase in Net Assets Discount > 0% and < 3% = 10% Increase in Net Assets
Decreases in Fund Net Assets for Funds Trading at a Premium*
Premium > 6% = 30% Decrease in Net Assets Premium > 3% and < 6% = 20% Decrease in Net Assets Premium > 0% and < 3% = 10% Decrease
Stocks Capped at 8% Index Weight
Combined Weight of Stocks with Weights over 5% Capped at 45%
22 © 2012 S-Network Global Indexes LLC., 267 Fifth Avenue, New York, NY 10016.
Summary – Index Features and Benefits
Feature Benefit
Asset Diversification
Index constituents hold various types of municipal bonds closed-end funds, including leveraged, unleveraged, leveraged high yield and unleveraged high yield.
Strategy Diversification Index constituents employ a wide range of trading strategies that diversify specific fund risk.
Manager Diversification Constituent municipal bond closed-end funds employ a wide range of managers, including some of the leading fixed income managers in the world.
High Current Yield At 6.16%, the CEFMX offers yields substantially higher than most fixed income investments.
High Current Discount At -0.58%, the CEFMX currently trades at an historically low valuation – exceeded only in times of severe market disruption.
CEFMX Offers Multiple Forms of Diversification that Help Diminish Specific Risks, while Providing High Current Yield and High Current Discount.
23 © 2012 S-Network Global Indexes LLC., 267 Fifth Avenue, New York, NY 10016.
Data Sources and Availability
Rule Books Available at: www.closedendfundindex.com Historic Data and Portfolio Snapshots at: www.closedendfundindex.com and various data vendors
Constituent Data Available at: www.closedendfundindex.com and various data vendors
Back Test Data from December 31, 2005
Live Data from October 29, 2009
Real Time Price Index Values in USD
EOD Total Return Index Values in USD
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