ETV: Discount Continues To Provide Attractive Opportunity

seekingalpha06-24

PM Images Written by Nick Ackerman, co-produced by Stanford Chemist. Eaton Vance Tax-managed Buy-Write Opportunities Fund (NYSE:ETV) provides investors exposure to a tech-heavy portfolio while writing...

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Eaton Vance Tax-managed Buy-Write Opportunities Fund (NYSE:ETV) provides investors exposure to a tech-heavy portfolio while writing index calls. By writing options, the fund can provide relatively higher distributions to investors by collecting options premiums. The fund's discount also continues to remain attractive, as it was the last time we took a look at this fund. In fact, it is virtually the same. That is even despite seeing the distribution increase shortly after that previous piece. The fund's total returns have also been quite attractive since our prior update. I would continue to view ETV as a 'Buy' today. ETV Performance Since Prior Update (Seeking Alpha) ETV Basics  1-Year Z-score: -0.72 Discount: -7.03% Distribution Yield: 9.01% Expense Ratio: 1.09% Leverage: N/A Managed Assets: $1.6 billion Structure: Perpetual  ETV's investment objective is to \"provide current income and gains, with a secondary objective of capital appreciation.\" To achieve this, the fund will invest \"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.\" Performance - Attractive Discount Remains The fund does not utilize any borrowings to leverage up its portfolio. The call writing could also be seen as a slightly defensive strategy, which can help to mitigate some declines in a falling market. That can make it an overall more conservative closed-end fund, relatively speaking. However, the premiums received can still only go so far in a rapidly declining market that it will still see significant declines similar to the benchmarks it is following. For this fund, it employs a mix between the S&P 500 Index and the Nasdaq 100. Those are also the indexes that the fund writes calls against as well. As is usual, when we are in a long bull market, like we've been for most of the last decade-plus now, a call writing fund will lag its straight indexes. The options writing can cap the upside and, in the case of index writing, produce losses as the indexes can climb past the strike price plus the premium received. On the other hand, when looking at the fund's performance against the Buy Write version of these indexes, the fund's historical track record looks much better. Of course, this fund can also deliver a monthly distribution to investors, and that's going to be appealing to income-oriented investors. The fund delivers these monthly distributions primarily from the underlying capital gains in the underlying portfolio and the options writing premiums it receives. This is the performance between the fund and its benchmarks as of the end of December 2023. Unfortunately, they don't have a more recent breakdown between the fund's performance and its benchmarks. ETV Annualized Performance Vs Benchmark (Eaton Vance) On a YTD basis, ETV is still performing quite well. This would be expected as the \"Super Six\" stock names continue to drive strong results, which are the names this fund is heavily invested in. Ycharts At the same time, one should consider that the market is at an all-time high. That may give some investors pause before investing significantly. We always know the market will crash, but it is never certain when that will happen. The market could continue to charge higher for years, which is why the saying \"time in the market beats timing the market\" comes in. Further, ETV also presents an attractive discount relative to its historical trading level. That doesn't guarantee that this isn't the new normal trading level, but it can suggest it currently isn't too expensive at this time. Data by YCharts Distribution Bump The outsized slump for ETV going to a large discount over the last couple of years was the result of a distribution cut. Shortly after our prior update, though, the fund announced an increase in the distribution. At that time, the other equity-focused Eaton Vance funds also announced increases. This is still below the prior high watermark level, but it was at least heading in the right direction. ETV Distribution History (CEFConnect) The reason for the increase was the strong performance of the market, and in turn, the fund saw the distribution yield start to come down to a modest level. Currently, the distribution rate on the NAV comes to only 8.32%, but thanks to the fund's discount, the market rate comes to 9.01%. The fund requires capital gains to support its distribution. That can come from the options premium received for writing calls or from the underlying portfolio. It is important to remember that one can't own an index directly, so it is essentially writing naked calls. There is a theoretical infinite loss possibility. In reality, though, the fund is hedged through its underlying portfolio that mirrors the index it's writing the options on. So, while not directly holding the index, it can't be a covered call; it is essentially an indirect covered call. What we can see from the last annual report is that the fund sustained significant realized losses in the written options sleeve. That resulted in losses of more than $117 million. Simultaneously, though, the fund also realized gains of more than $162 million from its underlying portfolio. In fact, the fund also saw unrealized appreciation in the portfolio of nearly $227 million. ETV Realized/Unrealized Gains/Losses (Eaton Vance) So, despite the losses realized from the underlying options writing strategy due to a rapidly rising market in 2023, the fund more than offset those losses from the underlying portfolio appreciation and gains. That results in the NAV continuing to rise and is an important consideration when determining if an equity fund is covering its distribution. Over the last ten years, NAV was down slightly by about 5%. Of course, the losses were deeper a year or two ago when tech was coming out of its bear market, but it is the overall general trend of the NAV that is important-we all know that the market is naturally going to be volatile and gyrate over time. Ycharts This is where the return of capital can come in and what can often confuse some newer investors, as they see ROC as only destructive. This is a topic we've touched on quite a few times, but it is always important to go over again when touching on ETV when ROC is a regular occurrence. It is simply because of what we saw above, the fund seeing significant losses from writing options but being able to more than offset them with the gains in the underlying portfolio. In total, they only realized a small amount of capital gains, which led to ROC classifications in the distribution. ETV Distribution Tax Classification (Eaton Vance) Tax-conscious investors look for non-destructive ROC distributions as it is a way to defer tax obligations. ROC isn't taxed in the year received but reduces an investor's cost basis. Therefore, no tax is due until potentially when the position is sold, if one ever sells it. Once it reaches $0, then further ROC distributions would be considered capital gains. The portion classified as ordinary income for ETV is generally considered qualified-for 2023, that was 100%. ETV's Portfolio With ETV usually having a very low turnover rate for most years, there generally aren't too many changes for the fund's underlying portfolio to touch on between updates. The highest turnover rate in the last five years was 19% in 2022. Otherwise, for 2023, turnover was 8%, with both 2021 and 2020 coming in at 9%. For 2019, the turnover rate came in at 6%. Given the fund's blended approach of utilizing the S&P 500 and Nasdaq 100 Indexes as a benchmark, we see a heavy tech portfolio. In the breakdown below, they list the \"Index\" weighting, but it appears this is only referring to the S&P 500 Index. As we know, the Nasdaq 100 Index is even heavier in tech, so it makes sense that ETV carries a higher allocation to tech than that. ETV Sector Allocation (Eaton Vance) When looking at the top holdings, we see those familiar Super Six names: Microsoft (MSFT), Apple (AAPL), NVIDIA (NVDA), Amazon (AMZN), Meta Platforms (META) and for good measure, both classes of Alphabet (GOOG)(GOOGL). Tesla (TSLA) is missing as that was formerly the Magnificant 7, but with weaker performance was dropped to now being the Super Six. Interestingly, we have Netflix (NFLX) in their portfolio, coming in as the 8th largest position, which was a name in FAANG when that group was popular and performing well. ETV Top Ten Holdings (Eaton Vance) It is important for carrying a portfolio that is similar to what they are writing those index options on, as we noted above, it is for hedging purposes. If there was a significant mismatch, there could be a time when the underlying portfolio is performing poorly but the losses are still being produced from writing the options. As we touched on previously, that's a problem their new Parametric Equity Premium Income ETF (PAPI) is going to have and why it should generally perform poorly. They continue to run an almost equal-weight sector portfolio, favoring a value-oriented approach slightly. However, they then write calls against (SPY). PAPI Sector Weighting (Parametric) Why they do this is unclear; they literally have the successful blueprint of the strategy from their closed-end funds but choose to ignore that. The only scenario I envision where PAPI would have worked relatively better is in 2022. A value-oriented approach performed much better, as it was primarily a tech-driven bear market. That would have seen PAPI's underlying portfolio perform well while at the same time generating additional option premiums from their SPY overwrite sleeve, as those likely would have expired worthless regularly as the index struggled. That scenario certainly could happen again in the future, but it is still a fairly oddly specific scenario that doesn't happen often. The reason this is a bit irksome is that PAPI could have been a great, low-cost alternative for when/if the premiums for ETV or Eaton Vance Tax-Managed Buy-Write Income Fund (ETB) became too high. It could have been a place to 'hide out' waiting for discounts to open back up in these CEFs. Currently, ETV and ETB are more attractive due to their discounts. But, due to, in my opinion, PAPI's inferior strategy and design, it isn't a great alternative anyway. Ycharts Conclusion  ETV provides investors with a monthly distribution derived from capital gains from writing options and/or from strong performance in the fund's underlying tech-heavy portfolio. The fund increased its distribution since our last update, and while it isn't back to where it was previously, it is heading in the right direction. The NAV rate also doesn't look all that high, given the continued strength in the underlying performance of the fund. The fund also continues to trade at an attractive discount relative to its historical average, presenting an opportunity for investors to continue to add or initiate a position in this name. The main caution might be that the markets are brushing up against all-time highs, so utilizing a dollar-cost average approach could be a more prudent strategy.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"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":"4.29.1","shortVersion":"4.29.1","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/2445050152"}