ETB: Tech-Heavy Portfolio And A History Of Underperformance Hurt This 9.63% Yielding CEF

seekingalpha04-26

PM Images The Eaton Vance Tax-Managed Buy-Write Income Fund (NYSE:ETB) is a closed-end fund that income-focused investors can purchase as a means of achieving their goal of earning a high level of ...

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One of the nice things about this fund is that it is not necessary to sacrifice the upside potential that can accompany an investment in common equities. This is different from many other income-focused funds that invest solely in fixed-income securities. Another nice thing about this fund is that the investor does not need to sacrifice yield, as is sometimes the case with those funds that invest in common equities. The Eaton Vance Tax-Managed Buy-Write Income Fund yields 9.63% at the current price, which compares reasonably well with the yield that is available from similar funds:   Fund Name Morningstar Classification Current Yield   Eaton Vance Tax-Managed Buy-Write Income Fund Equity-Covered Call Funds 9.63%   Virtus Dividend, Interest, & Premium Strategy Fund (NFJ) Equity-Covered Call Funds 9.31%   BlackRock Enhanced Capital and Income Fund (CII) Equity-Covered Call Funds 6.44%   First Trust Enhanced Equity Income Fund (FFA) Equity-Covered Call Funds 6.87%   Madison Covered Call & Equity Strategy Fund (MCN) Equity-Covered Call Funds 10.23%   Voya Global Advantage and Premium Opportunity Fund (IGA) Equity-Covered Call Funds 11.33%   Click to enlarge As we can see here, the Eaton Vance Tax-Managed Buy-Write Income Fund has a yield that is higher than several of the other funds in the same category, although it is far from the highest yield that is obtainable. It is arguable how comparable all of these funds are, however. There are some, such as the Madison Covered Call & Equity Strategy Fund, that write covered call options against nearly every stock in their portfolios and so sacrifice all the upside potential that accompanies a common equity investment. Other funds, such as the BlackRock Enhanced Capital and Income Fund, have a more balanced strategy with a lower overwrite percentage. There is generally a direct correlation between the percentage of the fund that is overwritten and the yield, so basically the higher-yielding funds have lower potential for capital gains and vice versa. The fact that the Eaton Vance Tax-Managed Buy-Write Income Fund is relatively middle of the road in terms of yield could thus be quite appealing to those investors who want a high yield along with some capital gains potential. As regular readers might remember, we previously discussed the Eaton Vance Tax-Managed Buy-Write Income Fund in late September 2023. The market at that time was very different from what we see today. At the time, it was widely expected that the Federal Reserve would keep interest rates at comparably high levels (even though a 5.5% federal funds rate is not very high historically) for an extended period. As such, there was a sell-off in long-duration stocks as various market participants worked to reduce the duration of their portfolios. For the most part, sectors such as technology got punished, but energy did just fine. Technology accounts for a much higher percentage of the market as a whole, so the major indices were punished. The reverse happened beginning in the final two months of 2023, which caused stock prices to skyrocket on the expectation of a \"soft landing\" and significant monetary easing in 2024. This latter environment has generally continued through to the present, although there are signs that the narrative may have begun to fray over the past few weeks. Regardless, the market has been overall strong enough that we can probably expect that shares of the Eaton Vance Tax-Managed Buy-Write Income Fund have performed reasonably well since the date that my previous article on this fund was published. This is true to a point, as shares of the fund are up 5.18% since the date of the previous article's publication: Seeking Alpha Unfortunately, we do see that the fund's shares have substantially underperformed the 18.68% gain of the S&P 500 Index (SP500) over the same period. This might disappoint some potential investors in this fund, but it is entirely expected. One of the defining characteristics of option-income funds is that they sacrifice a certain amount of upside potential in exchange for income. Thus, normally, we will expect the fund's shares to underperform common equities during a bull market. That is exactly what the above chart shows. However, as I have pointed out in numerous previous articles:  A simple look at the share price performance of a given fund does not tell the whole story of how investors in a given fund actually did during a given time period. This is because closed-end funds pay out most or all of their investment profits to the shareholders in the form of distributions. The basic goal is to keep the portfolio size relatively stable while giving the shareholders all of the profits that are earned by the portfolio. This is the reason why these funds tend to have a higher yield than just about anything else in the market. It also means that the shareholders are getting a return that is not reflected in the share price performance of the fund. The distributions that the fund pays will always result in the fund's shareholders doing much better than the share price performance would suggest.  As such, we should include the distributions that a fund pays out in any performance analysis. When we do that, we see that investors in the Eaton Vance Tax-Managed Buy-Write Income Fund benefited from a 10.70% total return since the date that my previous article on the fund was published: Seeking Alpha As expected, the Eaton Vance Tax-Managed Buy-Write Income Fund still underperformed the S&P 500 Index over the roughly seven-month period between the prior article and today. The performance difference is obviously much less stark than the price performance alone suggested, though, which might improve the opinion that potential investors might have about this fund. Generally speaking, buying it will result in giving up some total return versus the index during a bull run, so any potential investors should keep that in mind before making a decision. As roughly seven months have passed since the date that my previous article on this fund was published, we can expect that a great many things have changed. In particular, the fund has released an updated financial report that we will want to consult as part of our analysis today. There have been other changes as well, so this article will focus mostly on these changes and provide an updated analysis of the fund. About The Fund According to the fund's website, the Eaton Vance Tax-Managed Buy-Write Income Fund has the primary objective of providing its investors with current income and gains. As is frequently the case with Eaton Vance funds, though, it does not provide a description of how the fund aims to achieve this objective. Fortunately, the fact sheet does include such a description: The Fund invests in a diversified portfolio of common stocks and writes call options on one or more U.S. indices on a substantial portion of the value of its common stock portfolio to seek to generate current earnings from the option premium. The Fund's portfolio managers use the adviser's and sub-adviser's internal research and proprietary modeling techniques in making investment decisions. The Fund evaluates returns on an after-tax basis and seeks to minimize and defer federal income taxes incurred by shareholders in connection with their investment in the Fund. This strategy works pretty well with the objective that the website provides. The primary reason why most investors purchase common stocks is because they are after capital gains. After all, most indices have very low dividend yields right now. According to the Wall Street Journal, the four major American common stock indices have the following yields:   Index Current Yield   Dow Jones Industrial Average (DJI) 2.18%   Russell 2000 Index (IWM) 1.59%   Nasdaq 100 Index (QQQ) 0.89%   S&P 500 Index 1.44%   Click to enlarge Even stereotypically high-yielding sectors like utilities have fairly low yields. The iShares U.S. Utilities ETF (IDU) has a 2.52% trailing twelve-month yield today. The same can be said for the largest positions in the fund. As of the time of writing, the top ten positions in the Eaton Vance Tax-Managed Buy-Write Income Fund are the following: Eaton Vance Here are the current yields of each of these stocks:   Company Current Yield   Microsoft Corp. (MSFT) 0.73%   Apple Inc. (AAPL) 0.57%   NVIDIA Corp. (NVDA) 0.02%   Amazon.com Inc. (AMZN) N/A   Meta Platforms Inc. (META) 0.10%   Alphabet Inc. (GOOGL) N/A   Berkshire Hathaway Inc. (BRK.B) N/A   Broadcom Inc. (AVGO) 1.67%   Alphabet Inc. (GOOG) N/A   JPMorgan Chase & Co. (JPM) 2.38%   Click to enlarge Thus, nobody is purchasing common stocks for their yields. After all, not one of these common stocks offers a positive real yield given today's inflation rates. In addition, a typical money market fund boasts a higher yield than any of these stocks. As such, the reason to own these companies is because of the expectation that the price of the stock will go up over time. As the fund invests in these stocks for the same reason, its goal of the provision of capital gains makes sense. The fund's current income objective is satisfied through the covered call-writing strategy and, to a much smaller degree, by the dividends that some of the common stocks in its portfolio pay out to the shareholders. When the fund sells a call option, it receives an upfront payment from the buyer of the option that is known as an \"option premium.\" This option premium serves as a source of income for the fund, as it is able to keep the premium regardless of whether or not the premium is exercised. Thus, the fund's current income objective makes sense. There have been relatively few changes to the fund's portfolio since our previous discussion. In fact, the only two major changes to the fund's largest positions list were the removal of UnitedHealth Group (UNH) and Johnson & Johnson (JNJ). These two companies were replaced with Meta Platforms and Broadcom. Other than these two replacements, there have been a few weighting changes, but that is it. As I have noted in the past, a change in weightings can be caused by one stock outperforming another in the market. These changes are not necessarily driven by the fund buying or selling partial positions in order to actively change its positions. The fund only had a 9.00% annual turnover in the most recent quarter, which suggests that the weighting changes and order of the positions in the largest positions list are indeed being caused by relative stock performance rather than any intentional efforts on the part of the fund's managers. This is something that cost-conscious investors may appreciate, as a low turnover generally correlates to lower expenses. After all, it costs money for a fund to trade common stocks or other assets. The Eaton Vance Tax-Managed Buy-Write Income Fund has a lower turnover than all of its peers:   Fund Name Annual Portfolio Turnover   Eaton Vance Tax-Managed Buy-Write Income Fund 9.00%   Virtus Dividend, Interest, & Premium Strategy Fund 102.00%   BlackRock Enhanced Capital and Income Fund 28.00%   First Trust Enhanced Equity Income Fund 26.00%   Madison Covered Call & Equity Strategy Fund 106.00%   Voya Global Advantage and Premium Opportunity Fund 81.00%   Click to enlarge (all figures come from the most recent full-year financial report for each respective fund) As we can clearly see here, the Eaton Vance Tax-Managed Buy-Write Income Fund has a significantly lower annual turnover than its peers. Despite the fact that this fund is spending less money on trading assets than its peers, it has a higher expense ratio than most of them:   Fund Name Expense Ratio   Eaton Vance Tax-Managed Buy-Write Income Fund 1.11%   Virtus Dividend, Interest, & Premium Strategy Fund 0.96%   BlackRock Enhanced Capital and Income Fund 0.89%   First Trust Enhanced Equity Income Fund 1.16%   Madison Covered Call & Equity Strategy Fund 1.08%   Voya Global Advantage and Premium Opportunity Fund 0.99%   Click to enlarge In various previous articles, I have seen comments that suggest that some readers dislike high expense ratios. As such, it would be reasonable to assume that the fact that the Eaton Vance Tax-Managed Buy-Write Income Fund has higher expenses than many other covered call funds will be an immediate turn-off. However, ultimately, the most important thing that matters is how well a fund performs after paying its expenses. After all, most investors will overlook a very high expense ratio if they still end up making more money than they would have by investing in a cheaper fund. Unfortunately, the long-term performance of the Eaton Vance Tax-Managed Buy-Write Income Fund leaves a lot to be desired. Over the past five years, investors in this fund have realized a 27.99% total return. This is the lowest of any of its peers, in many cases by a very significant margin: Seeking Alpha This chart does consider the beneficial impact of distributions on each fund's returns. This is important because the distributions have the effect of raising their return well beyond that provided by the share price alone. The best-performing fund on this basis is the Madison Covered Call & Equity Strategy Fund, which managed to beat the Eaton Vance Tax-Managed Buy-Write Income Fund by 4,557 basis points over the trailing five-year period. Thus, it unfortunately appears that this fund has not justified its expense ratio over the medium term. The strategy of the Eaton Vance Tax-Managed Buy-Write Income Fund is slightly different from that of some of its peers, though. As I explained in the previous article: The fund writes call options against American indices in order to generate income, but it does not actually own any of the underlying indices. This is critical because it means that the fund is technically writing naked calls. A naked call-writing strategy is one of the most dangerous options strategies because the potential losses are unlimited. This comes into play if the index is trading above the strike price of the option upon expiration as that scenario would force the fund to pay whatever the difference between the index and the option strike price is on that date. The Eaton Vance Tax-Managed Buy-Write Income Fund has 159 holdings, but it is writing options against the S&P 500 Index. The fund's annual report shows the following short options positions as of December 31, 2023: Fund Annual Report The fund is clearly not holding sufficient positions to duplicate the performance of the index. Thus, it is potentially exposed to very large losses with these options should the index not move in a direction that its management expects. As we saw earlier, this fund does have significant exposure to the huge technology companies that have been responsible for an outsized proportion of the index's performance over the past decade, so the assumption is that the common stock portfolio will deliver a performance that is close enough to the index to avoid too much in the way of losses. However, there is no guarantee that this will be the case forever, so investors would be wise to be aware of the potential for losses from this strategy. This is not the case with many of the fund's peers. Several of the other funds that are shown in the peer comparison chart are simply writing call options against the individual stocks that they own. Thus, the worst-case scenario with one of those other funds is that they will have to sell some of the stocks that they already own at less than the market price. That scenario is less risky than what the Eaton Vance Tax-Managed Buy-Write Income Fund is doing. This is something that potential investors in the fund should keep in mind, particularly those who are especially risk-averse. Distribution Analysis As mentioned earlier in this article, the primary objective of the Eaton Vance Tax-Managed Buy-Write Income Fund is to provide its investors with current income and capital appreciation. In pursuit of this objective, it invests in a portfolio of common stocks that are intended to deliver capital gains. The fund then writes indexed call options against the S&P 500 Index in exchange for an upfront payment from the buyer. The hope is that the option will expire worthlessly, allowing the fund to keep the premium as income. As is evidenced by buy-write index funds like the Global X S&P 500 Covered Call ETF (XYLD), the premiums can be a sizable percentage of the index, depending on the length of the option contract. As such, the premium payments can serve as a very attractive source of income for the fund. The fund collects these premiums and combines them with any capital gains that it manages to realize from the common stocks that it holds in its portfolio. It then pays out the money that it collects to its shareholders, net of its expenses. When we consider that the option premiums can provide a respectable yield on the value of the portfolio and combine that with the capital gains that can be obtained from common stocks, we can assume that this business model will allow the fund's shares to boast a fairly high yield. This is indeed the case, as the Eaton Vance Tax-Managed Buy-Write Income Fund pays a monthly distribution of $0.1058 per share ($1.2696 per share annually), which gives it a 9.63% yield at the current price. As we saw in the introduction, this yield compares fairly well to the fund's peers, but it is not the highest yield that is available in the market. This fund has been reasonably consistent with respect to its distributions over the years, but it was far from perfect. As we can see here, the fund has cut its distribution a few times throughout its history: CEF Connect The fund raised its distribution in April from $0.0932 per month to $0.1058 per month. This is nice, but it is still below the $0.1080 per share monthly that the fund was paying prior to its late 2022 distribution cut. The fund previously cut its distribution shortly following the financial crisis of 2007 and 2008, which is understandable. After all, most funds cut their distributions around that time. There was no distribution cut in late 2012 as that was simply a change from a quarterly to a monthly payment schedule. The distribution remained at $0.3240 per share quarterly ($0.1080 per share monthly) from early 2011 until late 2022. That is a more consistent distribution history than most closed-end funds have managed over an extended period. Thus, this fund does not appear to be too bad for those investors who are seeking to receive a safe and consistent income that can be used to pay their bills or allow for the enjoyment of life. It is not perfect, but very few closed-end funds are. The fact that the fund recently increased its distribution is quite nice. However, this is not that helpful if it will not be able to sustain it. As such, we should have a look at the fund's finances in order to determine how well it has been covering its distribution and how strong this fund is financially. Fortunately, we have a relatively recent document that we can consult for the purposes of our analysis. As of the time of writing, the most recent financial report that is available for the Eaton Vance Tax-Managed Buy-Write Income Fund corresponds to the full-year period that ended on December 31, 2023. A link to this report was provided earlier in this article. This is a newer report than the one that we had available to us at the time of our previous discussion on this fund, which is quite nice to see. After all, this document should give us a good idea of how well this fund performed during the second half of 2023. As we can all recall, that was a fairly volatile market as the Federal Reserve's July 2023 rate hike caused a market-wide sell-off as market participants began to realize that there would not be a monetary pivot in the second half of the year. The American mega-cap technology companies that account for a significant proportion of this fund's portfolio were quite adversely impacted by that sell-off, so it seems fairly likely that this caused the fund to suffer some losses. The market then reversed beginning in late October as the general pessimism gave way to an epic market rally that almost certainly provided the fund with the opportunity to earn some gains. This report should provide us with some insight into the fund's performance during these two distinct periods that is far more in-depth than we had previously. For the full-year 2023 period, the Eaton Vance Tax-Managed Buy-Write Income Fund received $7,175,156 in dividends from the securities in its portfolio. The fund had no income from any other source, so this figure accounts for the entirety of its investment income. The fund paid its expenses out of this amount, which left it with $2,658,156 available for shareholders. As might be expected, that was nowhere near enough to cover the $32,851,760 that the fund paid out in distributions over the period. At first glance, this might be concerning, as the fund clearly did not have sufficient investment income to cover its payouts. However, there are other methods that the fund can employ in order to obtain the money that it requires to cover its distributions during a given period. For example, it might be able to sell common stock that goes up in price and realize some capital gains. It also receives option premiums when it sells an index call option. Realized capital gains and received option premiums are not considered to be investment income for tax or accounting purposes. However, they obviously do represent money coming into a fund that could be distributed. Fortunately, the Eaton Vance Tax-Managed Buy-Write Income Fund had a great deal of success at obtaining money via these alternative sources during the period. For the full-year period, the fund reported net realized gains of $13,619,048 along with $49,070,916 in net unrealized gains. Overall, the fund's net assets increased by $32,584,080 for the full-year period. Thus, the fund did technically manage to cover the distributions that it paid out over the period. However, it is important to keep in mind that this fund only managed to cover its distributions because of its unrealized gains. Net realized gains plus net investment income were not sufficient to fully cover the payouts. As we are all very well aware, unrealized gains can be very quickly erased by any market correction. So far, this does not seem to be a problem, as the fund's net asset value is up this year: Barchart This chart shows the net asset value per share of the Eaton Vance Tax-Managed Buy-Write Income Fund from December 31, 2023, until today. As we can see, the fund's net asset value per share is up 2.04% year-to-date, which means that it has fully covered every distribution payment that it has made in 2024 so far with money left over. This is a good sign, but there could be one potential hiccup. Early this morning, the gross domestic product report showed a massive miss, and the report also showed an increase in the core PCE deflator. This suggests that we could be entering a period of stagflation. The last time that this happened was in the late 1970s and early 1980s, and it was not good for common stocks. When we consider the tech-heavy portfolio of this fund, it could be in for some hard times if history repeats itself. As such, we should probably keep an eye on the fund's net asset value going forward until we get more visibility into how the new scenario could potentially play out. Valuation As of April 24, 2024 (the most recent date for which data is currently available), the Eaton Vance Tax-Managed Buy-Write Income Fund has a net asset value of $14.49 per share, but the shares currently trade at $13.09 each. This gives the fund's shares a 9.66% discount to the current share price. This is a fairly large discount that is above the 8.63% discount that the shares have had on average over the past month. As such, the current price appears to be a reasonable point at which to buy into the fund. Conclusion In conclusion, the Eaton Vance Tax-Managed Buy-Write Income Fund is an option-income fund that employs a somewhat unique strategy among its peers. It does not write covered calls as most funds in this category do, but rather it writes index options without actually owning the index. As such, it could be riskier than many of its peers, and this is something that potential investors should keep in mind. The fund also has underperformed its peers over the medium term by quite a lot. The recent distribution cut is encouraging, assuming that a market correction does not wipe out the fund's recent gains and its valuation is decent right now.  The fund is probably deserving of a \"hold\" rating. It might be in trouble if we encounter a stagflation scenario, but so will the major market indices and most other funds. At the moment, I see little reason to sell it. However, its underperformance relative to its peers and the higher level of risk when compared to a pure covered call fund make it difficult to recommend this fund right now.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2430268482"}