I'm at a loss for words at how some funds are finding buyers and no real sellers even at historically high market price premiums. Anyone buying the Nuveen S&P 500 Dynamic Overwrite Fund (SPXX), $18.13 closing market price, $16.02 NAV, 13% premium (estimate), 6.1% current market yield, really deserves to lose -15% of their investment from here.
Either that or on a comparative valuation basis, the BlackRock Enhanced Capital And Income fund (CII), $15.77 closing market price, $16.71 NAV, -5.6% discount (estimate), 6.3% current market yield, should be trading at closer to a 20% market price premium, which would put CII at $20.
How am I coming up with this? SPXX should NOT be trading at a premium valuation when its NAV will underperform the S&P 500 (SPY) in an up market environment. Who's buying SPXX at over $18 when its NAV is only $16.02? I have no idea, but if they think a 6.1% current market yield makes it worthwhile, they are wrong. Heck, SPXX doesn't even pay a monthly distribution!
But if that is what the market is valuing SPXX at, then CII should be trading at an even higher valuation. The first thing you will notice is that CII's NAV is already significantly higher at $16.71 vs. $16.02 for SPXX. Then take into consideration that CII is a more actively managed S&P 500 clone and should have greater upside capture at NAV than SPXX. CII also has a higher current market yield and pays a monthly distribution.
All together, CII on a comparative valuation basis should be closer to a 20% market price premium rather than a -5.5% discount. And if that's the case, then CII should be closer to $20 right now instead of $15.77. Now do I think that CII should be at $20.00? No, but it certainly should not be trading at a discount compared to SPXX. CII closed today at $15.77, up 0.2% while SPXX closed at $18.13, up 1.5%.
For more on these two funds, I wrote this article, Sell SPXX, Buy CII, on April 3, 2018, and I still stand by it.
Disclosure: I am/we are long CII.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.