New Fund Capitalizes on Two Strategies

For now, there is no information on the holdings. The 25% limit on a sector means that the fund could not make a big bet on financials, as that sector comprises roughly 20% of the S&P 500, but it could make massive bets on telecom, utilities and materials, for example, which are only 3% each in the S&P 500. While the prospectus allows for up to 25%, I doubt the fund will go eight times the market weight in any one sector.

The fund's only requirement is to have 80% in dividend-paying stocks. The other 20% could be allocated to stocks that the manager believes will offer growth for the fund.

Eaton Vance has said it expects the yield of this fund to be 9% to 9.5%, slightly ahead of the 8.6% paid by the Alpine Fund, and ETY does not expect to leverage the assets to get that yield.

The $2.6 billion this fund drew is noteworthy. A year and a half ago, Allianz raised roughly $2 billion when it listed the NFJ Dividend, Interest and Premium Strategy Fund (NJF - Cramer's Take - Stockpickr). This one sells options and looks for dividends but does not employ a rotation strategy to capture extra dividends.

In the past three years, a lot of money has gone into these types of funds because they are perceived as a safe haven, and although I buy into that, I would also urge moderation and prudence. These funds represent a lot of capital going to one particular part of the market. There is demand for these funds, so more supply (IPOs) is being created. At some point demand might wane, but there will still be a lot of supply. When supply is bigger than demand, prices fall.

As I say, I am a big fan of these funds, but even so, in keeping with my general rule of thumb, my clients have only 3%-4% exposure, and I would not own more than 5%. If something negative that no one sees coming hits these funds, a 5% weighting or less will simply result in a small performance lag, not financial ruin.

One last point always worth mentioning is that all closed-end funds are listed with a premium to NAV, which is primarily a selling concession to brokers selling shares through the IPO. In the case of ETY, it is 90 cents per share.

Most of the time this premium erodes in a couple of months, and perhaps the fund will trade at a discount to NAV. It is worth waiting the couple of months for that premium to evaporate.