Diversifying into the Russell 2000 (UPDATED)

RQI: Reduced from 5.71% to 2.84%

This REIT has appreciated almost 17% since purchasing it in April…didn’t expect that! The result is: 1/ It easily exceeded my 5% “cap” on any/all investments, and thus needs to be trimmed, and more importantly… 2/ The higher price means that the current yield is now below 8% and unlikely to grow significantly. Therefore I’m taking some of those profits and putting them to work earning more income elsewhere.

REITs and Utilities are expected to benefit from interest rate cuts, and this fund may continue to appreciate. However, I’m more focused on income, than potential appreciation. I’m not selling all of it, because I still want some exposure to real estate for diversification.

ARDC: Reduced from 5.2% to 3.89%

The price to NAV ratio of this fixed income closed end fund has moved from negative to positive for the first time in more than 10 years. Nice to see the market acknowledge the value of the fund, but this is unchartered territory from a valuation standpoint. 

Nothing wrong with the fund, just trimming because the further that the price rises above the NAV, the more risk of a price correction based purely on the emotions of the market (as opposed to the underlying fundamentals of the fund).

FSCO: Increased from 4.18% to 4.87%

This fixed income closed end fund is still trading at a discount to NAV, despite its stellar performance. The portfolio is balanced out to roughly half floating (will reduce income after a rate cut), and half fixed rate debt (will appreciate in value after a rate cut). In other words, I expect it to continue to produce consistent income regardless of whether the Fed cuts rates in the coming months.

WDI: Increased from 4.49% to 4.87%

This closed end fund’s fixed income portfolio consists of hundreds of corporate bonds, CLO’s, loans, and other debt instruments. Performance suffered under high interest rates, but it’s poised to benefit from interest rate cuts.

IWMI: Bought (3.09% Allocation)

This new addition is mostly about diversification. I don’t know if the Russell 2000 will benefit from a “rotation to value”, or the Fed cuts anticipated by the market. However, I like the opportunity to gain exposure to 2000 new companies (ie outside the S&P 500 or the NASDAQ 100). 

I don’t normally buy new funds, but NEOS’ Russell 2000 income ETF (IWMI) uses the same covered call strategy as the more seasoned SPYI, so I know what I’m getting, as explained with this recent interview with Co-founder and Portfolio Manager, Garrett Paolella.