Equity CEFs:  Playing With Fire In The Nuveen Option CEFs

by: Douglas Albo

When the most popular fund family in equity CEFs doesn't even specialize in stocks, you have to wonder just how much unsophisticated money is chasing equity CEFs.

It isn't so much that these funds can trade up to ALL-TIME market price premiums despite lagging NAV performances behind their benchmarks.

No, its more that there are so many other equity CEFs at steep discounts that would make so much more sense at this stage.

I like Nuveen. I own several of their municipal bond CEFs and leveraged equity CEFs that include senior loan and preferred securities. But the fact of the matter is that Nuveen would probably be thought of as more of a fixed-income bond house than a stock equity house. And yet, here are their pure equity, option-income index funds trading at all-time high valuations despite NAVs that significantly lag their benchmarks in a bull market.

What are the funds I'm talking about? They are the Nuveen S&P Dynamic Overwrite fund (SPXX), the Nuveen S&P Buy/Write Income fund (BXMX), the Nuveen NASDAQ-100 Overwrite fund (QQQX) and the Nuveen Dow 30 Dynamic Overwrite fund (DIAX). Current and recent performance statistics are shown in the box below.

Now I would first like to say that I am not against these funds and in fact, I strongly endorsed them when Nuveen re-structured all of them back in 2014. I wrote many articles and blogs back then on the restructurings and I owned them across the board.

Equity CEFs: QQQX And JLA Merger Opportunity

Equity CEFs: Buy JLA Over QQQX

Equity CEFs: The Nuveen Equity Option CEF Restructuring/Mergers Delayed Again

Equity CEFs: QQQX/JLA Merger Update

Equity CEFs: The Long Term Beneficiary Of The Nuveen Equity Option Restructurings

Equity CEFs: QQQX Back To Buy Valuation

Equity CEFs: How To Buy The Dow Jones Industrial Average At A -10% Discount And A 6.9% Yield

Equity CEFs: A No Brainer In The Nuveen Dow 30 Dynamic Overwrite Fund

Note: Articles/blogs are in chronological order

Obviously, these funds were a major focus of mine back in 2014-2015 and they all were trading at much more attractive valuations whereas now, they are all trading at premium valuations, some worse than others. Why is that so bad?

Because, unlike "book value" in stocks or other securities, there is NO QUESTION as to the under or overvaluation of an equity CEF as long as the NAV given by the fund sponsor is an accurate representation of the liquidation value of the fund. You often hear of "book value" for companies or stocks and how undervalued they might be. Well, that may be true but in a liquidation of assets of a company, I would not want to have to rely on "book value" as the basis for my investment if assets had to be sold.

But in equity CEFs (not necessarily fixed-income CEFs) in which the assets are readily marketable as Level 1 securities, your financial interest is represented by the NAV if anything goes wrong. The market price is purely subject to what other investors are willing to buy or sell the security at.

This is the reason why I focus entirely on the NAV and NAV performance of a CEF and give very little credibility to the market price. Now maybe the market price is not something you need to worry about in a bull market environment, but back in 2007 and early 2008 it certainly was.

But why should you care about discounts and premiums when there really is no threat of liquidation? Well, you may not have to worry about mergers or liquidations but there are ongoing events that will affect your investment return each and every time the fund goes ex-dividend. Every time a premium priced fund goes ex-dividend, you lose. How much you lose depends on how high the premium valuation is but when you start getting up to 10% to 15% market price premiums or more, you lose more than you realize over time.

It's simple mathematics. If a fund has to pay a higher yield (its NAV yield) than you receive (your market yield), you lose each and every time that occurs. I'm not going to go into the dynamics of how it is actually easier for a fund's market price to make up the ex-dividend amount when the fund trades at a premium valuation when you can read all about it here, Equity CEFs: Why CEFs Can Stay At Premiums/Discounts And Why That Doesn't Matter.

If you do not understand after reading this why CEFs at premiums cost you even if the premium stays the same, then you should not be owning these securities in my opinion. Now I agree, as long as there are unsophisticated investors (or perhaps institutional investors with pair trades forced to cover shorts or just trying to juice returns), then this can go on for some time. However, understand that at some point, it's going to make a lot more sense for more investors to sell their premium priced CEFs than investors willing to purchase them.


I wanted to get this out because I am seeing some of the most ridiculous moves going on in equity CEFs even while other CEFs languish at wide discounts with higher yields and just as good of NAV performance. Heck, it would make a lot more sense at this stage to just buy the index ETFs, (SPY), (QQQ) or (DIA) and sell your own options against your position. That's what I'm doing, though I own (XLK) rather than QQQ.

I'll be back with some alternatives to the Nuveen Option Overwrite CEFs but do yourselves a favor and don't chase these funds to ever higher market price premiums. You'll only cost yourself in the long run.

Disclosure: I am/we are long XLK, DIA. 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.