Nuveen S&P 500 Buy-Write Income Fund, 7.2% Yield (NYSE:BXMX)

Thesis

Nuveen S&P 500 Buy-Write Income (NYSE:BXMX) is a closed end fund that falls in the equity “buy-write” category. The fund currently has 265 portfolio holdings and seeks to replicate the S&P 500 index with an option overlay structure covering 99% of the portfolio. As per the fund literature:

The Fund seeks attractive total return with less volatility than the S&P 500 Index by investing in an equity portfolio that seeks to substantially replicate the price movements of the S&P 500 Index and by selling index call options covering approximately 100% of the Fund’s equity portfolio value with a goal of enhancing the portfolio’s risk-adjusted returns.

The fund has an impressive performance year to date, being down only -8%. Moreover the CEF has solid long term results which come in above 8.5% on an annualized basis and a 10-year lookback period.

We have so far reviewed a number of equity buy-write funds and we have noticed a substantial disparity between the market premia for the funds based on the overwritten portion of the portfolios. We are also going to look forward at the year after a big drawdown for the funds and try to assess which of the CEFs is a better choice given the sell-off in 2022 and expected recovery in 2023.

We can see from the above table that BXMX is also trading without a premium to NAV. It is a bit puzzling to see this relationship because BXMX does cover a large percentage of its notional with calls, although currently it writes covered calls with a higher than average “in the money-ness”. We would have expected BXMX to trade with a larger premium to NAV based on what we have witnessed for the Eaton Vance funds.

When we look at the historic performance for the funds following a year with large draw-downs we notice that ETB ranks first in terms of performance, followed closely by SPXX and BXMX. We expect 2023 to be a year with a solid equity market performance and hence we expect a repeat of what we saw in 2019 for BXMX.

BXMX has proven to be a very robust buy-write CEF with an enviable performance in 2022 versus the outright index and other asset classes. The fund is actively managed and we are expecting an outsized positive performance in 2023.

Option Overlay Details

Currently 99% of the portfolio has covered calls written against it:

We can also note that the options are written at approximately 4% out of the money levels. This means that the fund currently holds a bit of the upside if the market rallies under the 4% level until the expiry of the options.

The CEF takes a dynamic view on the option skew and volatility present in the market. What does that mean you might ask. If we look at the fact sheet dated March 2022 we will notice the following:

As of March the options written against the portfolio were only 1% in the money, and moreover the average days to expiration for the overlay was 31.85 days versus 23.37 days currently. This highlights the fact that the fund portfolio managers actively adjust the strikes of the written calls and the maturity of said calls. In technical terms the managers are active in taking advantage of the option skew and layering in views on market moves.

Performance

The vehicle is down only -8% year to date:

On a 5-year time frame we can see a significant basis versus the index:

The CEF is up only 28% on a five year basis while the index is up over 73%. The explanation lies in the portfolio composition and the fashion in which the funds sells most of the upside – with a 90% plus coverage of the portfolio via options and a small out of the money percentage the fund will lag in markets which are rallying aggressively.

A 10-year chart highlights the same relationship, although the fund has posted very robust annualized total returns over this period:

Holdings

The fund currently holds 265 names in the portfolio:

The top-10 holdings mirror the S&P 500 index:

Premium / Discount to NAV

The fund has historically traded at discounts to net asset value:

We can see from the above table, courtesy of Morningstar, that the fund has historically traded at discounts to NAV with the exception of brief periods in 2018 and 2019.

Distributions

Unlike other CEFs which cater to investors’ desire for monthly income streams, BXMX only pays distributions on a quarterly basis:

The distribution is also variable:

Conclusion

BXMX is an equity “buy-write” fund. The vehicle seeks to replicate the S&P 500 holdings and write covered calls on most of the portfolio. The CEF is down only -8% year to date, which is an enviable performance versus the index and other asset classes. The fund is actively managed in terms of options term and “in-the-money-ness” with the portfolio managers constantly changing the tenors and taking views on the options skew. The fund is trading flat versus its NAV, which is surprising when looking where the premia is for the Eaton Vance funds in the same category. In 2018/2019 after the big drawdown witness BXMX had a total return the next year that exceeded 20%. We expect history to repeat itself, with 2023 set to be a bumper year for the fund after the trials and tribulations of 2022 are put behind us.