Split Share Funds: The HONEST TRUTH...Falling Knife or BIG Opportunity? Q&A w/ Brompton

[@dkyrtata6688]

I found the graph (@ 19:35) interesting comparing the performance of a bank split fund, an equal weight banks ETF, a leveraged version, and a covered call version. I was surprised that the Covered Call fund consistently had the worst performance in most cases. I expected its declines to be less severe during volatile and down periods -- certainly better than the equal weights fund. That's what covered calls do; they reduce the down side through the premiums they earn at the risk of limiting the upside when they lose the stocks at their strike price

[@belovedsurfing7210]

I bought into DFN near $8. It hasn't paid a Distribution in months. It was down more than 50% for me, now at around 40%. I'm dubious it will recover back to $8. Splits are just fine, but don't overpay for them! 15% Premium. Around there should be your Cap. You can get better Yield than CC ETFs because of the incredible Leverage that comes from the Split structure, but it's undercut by paying too much for the shares. So, Splits are still good, just don't overpay, make sure the Holdings are Blue Chip, make sure the AUM and Volume are high, and you should be good. I learned the hard way with DFN and DGS. Thus, I pass on my experience to others.

[@mmmyeahh]

You didn’t average down when dfn was at 2.94 ?

[@efullname]

Swapped my DF and DFN in 2022, now I'm happily accumulating DFN at below $4. But true, avoid splits at premium.

[@paulvardon6653]

Has Dgs paid a dividend in months ? I bought low and did a swing trade to get out of that and txf, glad I did

[@belovedsurfing7210]

@@mmmyeahh I didn't want to put more money into DFN when I wasn't sure when it would be paying again. I used my extra cash to buy more funds which were reliably paying and were still at great discounts (RS, GDV, EIT, HDIF, HDIV, BKCL, BANK, etc.) I could run projections, but when DFN pays again is anyone's guess, and in the interim, I'd rather put money into funds which are trading low, and reliably paying out.

[@belovedsurfing7210]

​@@efullname Good play. If you sold in 2022 you were probably near DFN's high. Buying back in over the past few months is setting you up for an awesome yield. Nice move. Yup. It's a hard learned lesson, but buying Splits at more than 15% premium really stings when they drop like a stone because of the extremely high leverage effect of the split. I'm hoping I can sell out of DFN and at least break even. Might play it again in the future if it is as attractive as right now.

[@marcomarchand731]

A+ for the walk through. Thank you!

[@ran6070]

Yes! Unveiling the mystery of split shares, another layer revealed. Great info!

[@patrickbelanger6253]

The perfect timing for this video. Thank you Adrian!

[@boatscarsplaces6580]

Why are SS overnight offerings necessary?

[@aaronhall5715]

Thanks Adrian, I've been thinking about transitioning out of Split Shares into ETFs. May give them another look.

[@randalxu4889]

Nice video Adrian! Every video from you is a learning opportunity. I thought I understand how split share fund works, but now gained couple more insights. 😅 Yes, a crucial part of successfully investing is patience, avoid making emotional decisions and stay disciplined. Thanks Adrian!

[@PassiveIncomeInvesting]

Thanks Randal !

[@RongRoseLiu]

Thanks Adriano, I learned that the leverage of a SS is almost limitless depending on the premium at which the shares were bought at. I’m nevertheless in the process of swapping out of the banking SS for the equivalent ETFs. What’s your take on *temporarily* being heavier in a sector while you buy low in the ETFs and wait to sell high of the SS? I’ve been discovering that once you’re fully invested it’s like trying to move up the property ladder: your current home might’ve increased in value but the next home up the ladder has increased proportionally as well 😅. I’ve been enjoying SPLT since your introduction of it. I keep my “dry powder” in there for when the market goes on sale.

[@PassiveIncomeInvesting]

i think its fine to DCA something you want to eventually swap. SPLT is a really good cash alternative IMO . don;t break your head over sector allocation TOO MUCH. the Canadian Market is 50% Financials and Energy lol. Most Canadians are overweight in Financials. But the 6 banks have always outperform the overall TSX Comp. anyways. and Tech outperforms everything. its ok not to be "perfectly" diversified IMO

[@RongRoseLiu]

Wonderful! Thank you so much Adriano! @@PassiveIncomeInvesting

[@catherinedesilets8960]

Thanks for the explanation Adriano! For me as a newer investor this is too confusing yet.. so just regular covered call funds are easier for me to stay comfortable with :) Maybe one day I’ll understand split share funds ..

[@dkyrtata6688]

Don't be intimidated by split funds. Like anything, it's the details that make split funds confusing. I tried to explain them to a friend of mine last year. This is the analogy I wrote: Let's suppose you and I both invest $50 in a dividend stock for a total of $100 and that stock appreciates by $30 to $130. As a Class A investor, I get to keep the entire $30 of the appreciation as a capital gain. As a Preferred share investor, you get to keep the $3 of dividends (max) it pays out yielding you 6% of tax efficient dividend income. Although the stock's return from its appreciation is 30%, my personal return on the growth is 60%; your return is zero (Dividends are not growth). Had we arranged our deal to have two investors like you (splitting the $100 investment three ways of $33.33 each), my return would be 90% even though the investment still appreciates by 30%. And a fourth investor at $25 each would yield me 120%. In all cases, I get the $30 of appreciation. Do you see how your money is working for me but not for you? That's how split share funds work. So the more investors there are like you, the more I benefit (by having to invest less capital for the same payout). Conversely, when the stock declines, I take a big hit while you do not. However, if the stock declines below $50 you start to take a hit too while MY SHARE share reaches a net asset value (NAV) of zero. But even at zero, you are still entitled to your $3 dividend while all payouts to me are suspended (and forfeited) until the overall value recovers to above $60.

[@Feta_Cheezz_Montgomery_Burns]

Chris Cullen's mustache alone is worth the price of admission.

[@Meisterinsekt]

As a German investor, I cannot buy any more shares due to the trading restriction known as MIFID2. However, it is possible for me to add further shares as part of share issuance programs. Does anyone know if Brompton is planning or providing such programs for DGS? Where can I find information about them? I would like to add more shares of DGS.

[@CanadianDividendInvesting]

Awesome video Adrian, love it!

[@Goforitmanager]

This ought to be one of the best videos on Split Shares, well done guys and thank you.

[@PassiveIncomeInvesting]

Glad you enjoyed it!

[@peterlau9506]

Since the leverage increases with decreasing NAV, what happens to the fund when the NAV is less than 10 dollars which is possible. Does the fund got liquidated?

[@PassiveIncomeInvesting]

Unit nav you mean ? I don’t think that’s possible unless the stocks go to zero . So that’s the real question

[@peterlau9506]

@@PassiveIncomeInvesting yes, it it possible. If the leverage is 200 percent (that is when the A share NAV is 5 dollars) all it takes is for the underlying stocks to drop by 33%, the A share NAV would theoretically zero.

[@smallmj2886]

I would like to see a 4 way comparison chart that covers a bad decade, like the 2000's. It would have to be modelled, since SBC didn't start until 2005, but if they could make a decent model it would make for an interesting comparison.

[@bananahead44]

just ask them the question and stop putting words in their mouth. Very long winded questions Adrian. Not very good interview strategy. Just let them answer. You can get very convoluted.

[@RongRoseLiu]

Really? I thought it was great, as per usual.

[@joannapatterson4625]

I still have ENS and BK but I am not adding to these, in favour of ENCL and BKCL.

[@blanksy_-]

ditto .. the new funds get even better .

[@henryhonda8408]

Hi Joanna...... I got out of all my split funds and even BK that I liked so much, just before it tanked a couple months ago and swapped it into BKCL with about the same yield but without the headache of constantly worrying about the Unit Nav threshold. I've out of ENS for over a year and bought ENCC when the ETF began and just this month I swapped half of my ENCC to ENCL at close to an 18% yield. I recently started a nice position in YTSL when it bottomed around the $20 mark (curious if you bought any). Take care, we miss you in Facebook.

[@henryhonda8408]

@@blanksy_- hey Nick...... how are ya these days? Back in Canada yet?

[@blanksy_-]

hi Henry . enjoying UK now . just back from Morocco @@henryhonda8408

[@RobertCheszes]

I don't feel he answered your question directly in regards to competing with CC funds. He talked about PM's options to pay for leverage. However the premiums paid to Nav as of today when there are many other options for high yield was not directly addressed.

[@ricknash3055]

It was an excellent episode. What date(s) are used to determine if a dividend will be oaid out? Presumably looks like it qualifies for a Nov div? 4.88+11.12=15

[@ShawnHenderson-d2m]

My concern is what happened to Bromptons split fund OSP could happen to any split fund,they say to look at what the fund holds & OSP holds solid energy companies but this one has never really recovered. same with Quadravest FTU, US financial stocks, this one has not paid a dividend in years

[@dkyrtata6688]

Yes, I am very curious how some of these split funds got to be in the condition they're in. It's as though it was by design; maybe for investors looking to make loses

[@the_ikiru]

The preferred takes all the dividend every month. No NAV growth from dividends.

[@peterlau9506]

Since the leverage increases with decreasing NAV, what happens to the fund when the NAV is less than 10 dollars. Does the fund got liquidated?

[@mmmyeahh]

Yeah remember it’s all on how they’re managing the funds , they do F up , quadravest obviously screwed up on FTU. Probably sold off a lot of what was in the fund thinking that nothing was going to recover… same with OSP . It would have been a good tough question to ask them about what happened to OSP , but I don’t think he wanted to put them on the spot like that …

[@dkyrtata6688]

@@peterlau9506 That's why the fund managers are asked to reduce the leverage as the NAV go down (as stated in the interview). Yes, I think the fund goes bust but no likely with 25% leverage on Canadian Bank ETFs. There was an article in the Globe and Mail a couple of years ago (I can't find it anymore) which described this happening in the U.S. where some funds were taking on 100% leverage. The article went on to say that the rules here do not allow so much leverage but those rules are changing slowly. Split funds work differently. The leverage is not from borrowed money but from the money invested by preferred share holders. So it does not matter how low the fund goes. There is no margin call. Interestingly, in 2020 PIC.A split fund had a unit NAV of under $15 which means that the NAV for the class A shares was negative but published as zero. Nevertheless, the fund continued paying out its distributions but only half the amount until the NAV recovered to 3-4 dollars. In fact, the NAV for that fund is lower now than in 2020 but the fund is still paying the full distribution with a yield of 20.46%

[@efullname]

I like split corp predictability of 0.1 monthly, unlike some ETF the monthly div will vary, though CC ETF will keep on paying in down market at lower yield like BTCY and ETHY some split corp might not, but my DFN at 28% yield WHEN it starts paying, where on earth can my money work very hard like that

[@PassiveIncomeInvesting]

Yes it is an advantage

[@master15951]

Just let us know when will NAV come back to 15$. so when we can get Distribution ?

[@dkyrtata6688]

From what I can tell, they use the last NAV calculation before they make the declaration. So for Brompton, it seems to be the NAV from the third week of the month; for Quadravest the NAV from the 15th (since they only publish two on the 15th and 30th). For DGS, they will probably use the NAV on Nov 23rd but if they use the one from the 16th, no distribution.

[@henryhonda8408]

@@dkyrtata6688 that would have been a good question to ask the Brompton managers....... when is the date this month that will decide if DGS is paying the distribution. If it's on the 17th then you have to factor in how the market & specifically the holdings in the fund did on that Friday. I believe the Unit Nav was $15.00 on the 16th and they need to get to $15.24 to pay the distribution this month as they have to pay the B Shares this month (10 cents for the A Shares & 14 cents for the B Shares/Preferred Shares because they only pay that every 3rd month). If the 23rd is the distribution decision day then we'll have to wait until next week to find out BUT the key number is the "Unit Nav" has to be at $15.24 ...... I get daily numbers of DGS's Unit Nav in the Stockhouse website and then go to the "DGS Bullboard", there's a couple fellas there that have a fairly accurate number of the Unit Nav for the end of that trading day (they have a spread sheet on all DGS's holdings so they're fairly accurate).

[@mmmyeahh]

Dgs is at $15 now

[@master15951]

@@mmmyeahh 🤔

[@mmmyeahh]

@@master15951 the NAV is $15, I should of specified.

[@ajfresco]

Thanks Adrian!

[@aimanmahmood3462]

Hi Adrian - As always very informative session on split share fund. I noticed that both FTN and DFN have upcoming termination dates based on Financials - Could you please share your thoughts on the impact of this event on price action and any risk for longterm investors? I have recently started a PI portfolio and looking to add some split share fund exposure for longterm investing. Thanks.

[@PassiveIncomeInvesting]

nada - discussed "termination dates" many times :) check my split funds explained video

[@0001www]

Termination dates don't mean much because they always get renewed

[@alinaderi6357]

I understand that these funds are leveraged and their moves are amplified. What I don’t understand is why at sometimes, some of these funds take a nose dive to the downside within minutes, when the underlying assets for the most part are going the opposite direction. Is there a lag effect?

[@caughtoncam4800]

Good info that I included on my CFP FB Page, to augment the info to my investment dedicated pages

[@DynamiteD-vp]

I hope we're not asking the same question about covered call funds in 6 months from now

[@willart1735]

Other than her saying "umm..." 5000 times this was very informative

[@dominiquetheeasyminimalist]

Our Total return isn’t affected when distributions are suspended 😂🙄🙄

[@PassiveIncomeInvesting]

it isn't . i guess you don't understand why?

[@christianketterer7652]

To me it’s very simple. I keep those which continue paying and cut my losses on those which don’t, investing the remaining money in other income funds.

[@TotBy22]

Michelle... You know...

[@mmmyeahh]

She is hot tho