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Silver-Rated CEF Is an Intriguing Alternative Income Option

Nuveen S&P 500 Buy-Write Income produces more income and less volatility than a traditional S&P 500 fund, but its upside potential is limited.

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Wiley Green: The Nuveen S&P 500 Buy-Write Income fund is a solid covered call closed-end fund and earns a Morningstar medalist rating of Silver. While the fund is a Nuveen offering, the portfolio is managed by an accomplished veteran team from Gateway Investment Advisers. They assemble a portfolio of stocks that mimics the price return of the S&P 500, but does not employ full index replication. Stock sampling can provide a tax advantage, and in some years, turnover at this fund is lower than the S&P 500 itself. 

Next, a measured options overlay reduces the volatility of the stock portfolio and generates extra income, giving up some upside potential in the process. The fund will generally perform strongly in down or flat markets and lag when stocks rise. The fund consistently beats most option writing closed-end, open-end, and exchange-traded funds on a risk adjusted basis. 

Investors in covered call products should carefully weigh the income production and volatility reduction that is gained versus the reduction in upside potential--strong equity returns have tended to leave covered call products behind in terms of total return longer term. For those seeking an alternative source of income, the strategy is an intriguing option.

Wiley Green does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.