BXMX - BXMX: Solid Buy-Write Fund Yielding 7%

2023-08-22 21:44:31 ET

Summary

• The Nuveen S&P 500 Buy-Write Income Fund writes index call options to enhance risk-adjusted returns and fund an attractive distribution yield.
• The fund has delivered solid historical performance with average annual returns of 10.0%/6.9%/7.5%/6.8% over 3/5/10/15 years, sufficient to fund its 7.3% distribution.
• However, investing in BXMX may lead to long-term underperformance compared to passive market funds like the SPY ETF.

The Nuveen S&P 500 Buy-Write Income Fund ( BXMX ) sells S&P 500 Index calls to generate premium income to fund a generous 7.3% distribution yield.

While the distribution yield may appeal to some income-oriented investors, investors should be aware that buy/write strategies trade off upside for premium income that leads to long-term underperformance. Personally, I would not make that tradeoff.

Fund Overview

The Nuveen S&P 500 Buy-Write Income Fund is a closed-end fund ("CEF") that invests in S&P 500 Index stocks while providing an attractive yield from writing S&P 500 Index call options on approximately 100% of the fund's equity portfolio to enhance risk-adjusted returns.

The BXMX fund tends to write at the money ("ATM") call options with 1 to 2 months until expiry (Figure 1). As of July 31, 2023, the BXMX fund had 99% coverage (i.e. it wrote options equivalent to 99% of the fund's portfolio) with average call strike at 100% of spot and weighted average days to expiration of 55 days.

The BXMX fund is popular with investors, having garnered $1.4 billion in assets while charging a 0.89% net expense ratio.

Investors should note that the BXMX fund is sub-advised (i.e. managed) by Gateway Investment Advisers, LLC , and Gateway is not affiliated with Nuveen, LLC, the sponsor of the fund.

Portfolio Holdings

Figure 2 shows an overview of BXMX's holdings. The fund has 250 positions as of July 31, 2023, with 99% of the holdings being large caps.

BXMX's sector allocation, shown in Figure 3, is very similar to the allocation of the S&P 500 Index, as modeled by the SPDR S&P 500 ETF ( SPY ) shown in Figure 4.

Returns

The BXMX fund has delivered solid, if unspectacular, historical performance with 3/5/10/15Yr average annual returns of 10.0%/6.9%/7.5%/6.8% respectively to July 31, 2023 (Figure 5).

Note, as a call-writing strategy , the BXMX fund is expected to underperform the S&P 500 Index in the long run. This is because call-writing strategies trade off upside returns for premium income.

For comparison, the SPY ETF has delivered 3/5/10/15Yr average annual returns of 13.6%/12.1%/12.6%/11.1% respectively on the same time frames, significantly ahead of BXMX (Figure 6).

Distribution & Yield

In terms of distribution, the BXMX fund is scheduled to pay $0.2365 per quarter, which annualizes to a 7.3% yield on market price (Figure 7). On NAV, the BXMX fund is yielding 6.4%.

BXMX pays a 'managed distribution' whereby the distribution rate is established at the beginning of the year and corresponds to the manager's projection of the total return that can reasonably be achieved by the strategy. For BXMX, its 2023 distribution of $0.946 is equivalent to a 7.5% yield on its 2022 ending NAV of $12.65. This is inline with the fund's long-term historical returns of ~7% per year.

BXMX's strategy of paying a sustainable distribution is commendable, as not many CEFs I have reviewed have the restraint to not overpay. Funds that pay more than they earn are called 'return of principal' funds and the BXMX fund does not appear to be an example of a 'return of principal' fund.

This is confirmed by an analysis of BXMX's NAV, which has generally stayed flat except for a plunge during the Great Financial Crisis in 2008/2009, indicating the fund was able to earn its distribution (Figure 8).

BXMX vs. Buy/Write Peers

Figure 9 compares the BXMX fund against peer buy-write strategies like the Nuveen S&P 500 Dynamic Overwrite Fund ( SPXX ), the Eaton Vance Tax-Managed Buy-Write Income Fund ( ETB ), the JPMorgan Equity Premium Income ETF ( JEPI ), and the Global X S&P 500 Covered Call ETF ( XYLD ).

In terms of fund structure, the BXMX fund is very similar to the SPXX fund that is also offered by Nuveen, as both funds charge a 0.89% expense ratio. However, while the SPXX fund dynamically writes call options on 35-75% of its portfolio, the BXMX fund aims to overwrite 100% of its portfolio. Returns are very similar between the two strategies, with both having long-term annualized returns of 7-8%. The distribution yields are also very similar between BXMX and SPXX.

Relative to Eaton Vance's ETB fund, the BXMX fund is slightly cheaper while delivering similar total returns. The key difference between the two is that the ETB fund pays a monthly distribution compared to BXMX's quarterly distribution. ETB also pays a slightly higher distribution yield, but that is not fully supported by a higher total return.

Compared to the ETFs JEPI and XYLD, the BXMX fund is noticeably more expensive, with a 0.89% expense ratio vs. 0.35% for JEPI and 0.60% for XYLD. The BXMX fund has actually delivered better annualized returns compared to the XYLD, despite its higher fees. Compared to JEPI, BXMX has better short-term returns, although JEPI's 3Yr annualized return of 11.5% is the highest among the 5 funds.

Both JEPI and XYLD pay a higher distribution yield than BXMX, however, XYLD's 11.4% trailing distribution yield may not be fully supported by the its 3 and 5Yr annualized returns of only 9.2% and 4.8% respectively to July 31, 2023.

Overall, the BXMX fund delivers solid, if unspectacular returns that is sufficient to fund its 7.3% trailing distribution yield. However, as we stated above, total returns for the buy/write strategies lag the SPY ETF, especially over longer time-frames.

Do It Yourself With SPY May Be Better

While BXMX's 7.3% distribution yield may appear attractive, I believe an investor may be able to achieve a better outcome by investing in the SPY ETF and making regular withdrawals to achieve their desired yield.

For example, since BXMX's inception in November 2004, an investor who invested an equal amount of $10,000 into BXMX and SPY, reinvested all distributions and withdrew 7.0% on an annual basis would have more money left over if they had chosen SPY over BXMX (Figure 10, Portfolio 1 is BXMX plus 7.0% annual withdrawal; Portfolio 2 is SPY plus 7.0% annual withdrawal).

Furthermore, with a higher account balance (due to higher total returns), the SPY portfolio actually allows for higher withdrawals (Figure 11).

Conclusion

The Nuveen S&P 500 Buy-Write Income Fund pays an attractive distribution yield funded from writing S&P 500 Index calls on approximately 100% of the portfolio's notional value. The BXMX fund has generated solid historical returns that have been sufficient to fund its distribution yield.

However, compared to the SPY ETF, the BXMX fund has given up a significant portion of the portfolio's upside in exchange for premium income.

I personally prefer the higher total returns from the SPY ETF, as investors can withdraw a fixed percentage on a periodic basis to replicate BXMX's cash flows. At the end of the day, higher total returns should be the main goal of investing.

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