SPXX - SPXX: Poor Performance From This Buy-Write Fund

2023-05-24 05:44:41 ET

Summary

• SPXX is an equity buy-write closed-end fund from the Nuveen family.
• The CEF has posted a negative total return so far in 2023, when the S&P 500 is up more than 10%, and other buy-write CEFs have delivered.
• SPXX's structure does not fully take advantage of the covered call optionality, and its collateral is not tilted toward mega-caps.
• A retail investor could have done a very simple buy-write trade themselves at the beginning of the year and be up over 6% in 2023.

Thesis

Why do people invest in complex structures? Usually because they can generate returns that are otherwise not available to retail investors. The Nuveen S&P 500 Dynamic Overwrite Fund ( SPXX ) is such an instrument. A retail investor pays the manager a 93 bps fee in order to engage in as systematic buy-write strategy that, in theory, should outperform. It is not the case here, with SPXX deep in the red for 2023. We have covered this name before here , where we benchmarked the fund's performance to other buy-write CEFs from the lens of the 2022 market sell-off.

We are always advocates of very simple things, since they usually tend to make money. Some complex strategies work wonders, but many are just set up so that managers can generate fees rather than returns. We think it is the case here. Let us take a simple example - let us say a retail investor fully invested in the S&P 500 at the beginning of the year and wrote a 5% out of the money call on the portfolio with a June 1, 2023 maturity date. We are fast approaching said date, and the S&P 500 is up over 10%. That makes it very likely that the call option will be exercised. However said investor would be up somewhere in the 6% to 7% range this far in the year. That return is very simple to compute - on one hand you have the 5% return from the underlying stock (the investor realizes the gain to the call strike) plus the option premium, which would have generated an incremental 1% to 2%. In a very broad sense, this is what SPXX is supposed to do, yet the CEF is down -1.4% year to date!

In this article we are going to look at a couple of structural features that contributed to this state of affairs, but at the end of the day, through very simple trades, an investor would have been able to generate a much, much higher return by themselves. That begs the question if this CEF is a viable name to invest in.

In our minds, a CEF structure is good only when it delivers on its goals via its structure. What should people do when a structure fails consistently at its stated goals? They should just run from it. Not walk. Run.

What went wrong?

Unlike some of its peers, this fund holds as many individual equities as the index:

One can find 518 line items there because the option positions are included. So far this year mega-caps have outperformed, while the equal weighted S&P 500 ( RSP ) is up only 1.2%. This means that SPXX has not benefited from the positive performance that other buy-write funds have gotten from being overweight mega-caps.

Secondly, the fund does not overwrite the entire collateral pool:

We can see from the above table that only 54% of the holdings are covered by written calls, the rest being just outright long holdings. The average expiry for the held options is around 18 days, making the fund very short dated in terms of exploiting the VIX structure and skew. VIX has been hammered all year, therefore the fund has sold lower and lower levels in volatility (this is not very profitable).

Thirdly, the fund put out a very tight strike level for its sold calls - on average 1%. As the market has moved up, the fund has negatively settled a significant amount of written call options.

Performance

The fund is down year to date versus positive performances for its peers:

From the above cohort which includes some of the gold standards in the space, the fund is the only one down. Long term, the story is very similar:

In the past five years the CEF is up only 12%, when its peers are up 2x or 3x. Not a good story.

Conclusion

SPXX is an equity buy-write CEF. The fund charges 0.93% annually, but has been a constant underperformer. In fact, a retail investor who would have bought the S&P 500 at the beginning of the year and wrote a 5% out of the money call with a June 2023 expiry date would have delivered over 6% in returns, while SPXX is negative for the year. We are not fans of complexity for the sake of just paying fees, and we feel CEF structures need to deliver, otherwise retail investors should not use them at all. In SPXX's case, its structure which is not tilted towards mega-caps and does not fully utilize the overwrite capacity has failed to produce superior results when compared to a simple trade that a retail investor could have made themselves. Its track record also underscores the poor set-up for this buy write fund. We do not see a good forward for this name, and there are a number of much, much better buy-write funds out there such as ETV or JEPI. We would divest from SPXX fully until it tinkers its current set-up.

For further details see: