Let’s find out what this Eaton Vance Tax-Managed Diversified Equity Income Fund ETY is all about. We have been fielding a lot of questions about this stock as a lot of our clients and students have been hearing about it lately.
Just like we have done many other times, we will go through ETY like we do everything else. We will talk about its liquidity because we do not ever trade or invest in any products that are not incredibly liquid.
To be honest, a stock that is managed by a professional having that long of a name scares me as it makes it look like a marketing ploy. We will give it a fair shot and see if we should add ETY to our portfolio or not.
Eaton Vance Tax-Managed Diversified Equity Income Fund (ETY)
Enough about the fluff. Let’s get right into it. We want to know if adding this stock to our portfolio is the right move or not.
For starters, this is a managed fund. Which means they are taking a basket of stocks to create the price movements of this product. Here are the top ten holding of Eaton Vance.
These stocks all look quite familiar and are amongst the highest volume stocks traded every day. But we dig a little deeper, this is pretty much like trading the Nasdaq as seven out of the top ten holdings of ETY are highly correlated to the Nasdaq.
On top of this, this stock currently pays a $1.01 dividend. What is special about Eaton Vance is that the dividends are distributed monthly as opposed to the industry normal which are distributed quarterly. This is probably why people get so excited about ETY. While this is absolutely a huge plus (currently almost a 10% dividend), we still cannot move forward in good faith unless we have full confidence in the liquidity of this stock. However, having liquid options with the combination of such a large dividend would make this a juggernaut of an investing vehicle. Here we go.
Liquidity is the most important thing when looking at a potential trade or investment. The reasons we look at liquidity before anything else is because we want fair markets where we can get filled at midprice at any size and instantly. Doing this allows us to not have to open a position with a loss.
We want to check not just stock liquidity but also options liquidity. Let’s start with stock liquidity. The two things we are looking for here are the following:
- Tight bid/ask spread
- Over one million shares traded
If these both are true, we know there is a lot of competition to trade Eaton Vance and we will have confidence in opening our position at fair value. Let’s see what the stock bid/ask spread is here in ETY.
Looks good to me. There is no bid/ask spread in stocks that are better than the $0.01 shown above. Excellent. Let’s move on to stock volume. Again, we want to see over one million shares traded.
Four hundred thousand is not even half a million. This stock volume is not acceptable. If we take the stock price ($11.113) and we multiply that by the stock volume (420,039) we get the total notional value of the stock traded today. That number comes out to only $4,667,893.41. This is embarrassingly low and shows us that there is not only weak competition in this name but also zero institutional interest in ETY.
For example, there were multiple trades in SPY today that were over $50,000,000 in notional value.
ETY looks terrible for stock liquidity…but what about options liquidity? Maybe their options markets are so liquid that it won’t matter that there is very little stock participation?
Ew. They don’t even have options.
How are we going to give ourselves a better chance of making money? How are we going to reduce our downside? We aren’t!
The Final Verdict on ETY
We recommend that you do not add Eaton Vance to your list. While getting a 10% dividend is nice and nothing to snuff at, we must remember that the stock price is reduced by the dividend payout over the course of the year. This means that Eaton Vance’s stock price is reduced by $1.01 over the year because that is what it’s dividend is.
Do you still want to trade it because of the dividend? This is how ETY compares to its top three holdings over the last three years…
We can see Eaton Vance in red/green down 0.63%, Apple up 83.7%, Microsoft up 59.89%, and Google up 43.58%.
Again, seven out of the top ten holdings are highly correlated to the Nasdaq, and what is the best way to get direct exposure to the Nasdaq? Trade Powershares QQQ. It provides direct exposure to the top ten holdings of Eaton Vance and it is incredibly liquid, trading millions of shares per day and hundreds of thousands of options per day.