Eaton Vance ETW Fund: International Stocks CEF, 8% Yield

Government bonds

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Thesis

Eaton Vance Tax-Managed Global Buy-Write Opportunities Fund (ETW) is a closed-end fund whose primary investment objective is to provide current income and gains, with a secondary objective of capital appreciation. The fund achieves its stated mandate by investing in a portfolio of international stocks and writing call options on both U.S. and foreign indices on a substantial portion of the underlying portfolio. ETW is thus a “buy-write” fund, with a slight basis between the underlying common stock portfolio and the indices on which the options are written. The fund has been in existence for more than 15 years and it displays favorable risk/reward metrics. With a 0.77 Sharpe ratio (versus a 0.72 Sharpe for the Morningstar Derivative Income Total Return Index) and a low standard deviation of 11.8 (when measured on a 5-year basis) ETW constitutes a good vehicle to follow a thesis of muted 2022 stock returns but higher overall market volatility. The fund has very solid trailing returns, with the 3- and 5- year trailing total returns standing at 15.5% and 12.2% respectively. An investor concerned that the market will experience increased volatility in 2022 but ultimately will not exhibit the same outstanding returns as in 2021 is well suited to take advantage of that view via this vehicle. We like this fund from the Eaton Vance buy-write suite for its international exposure and we are Bullish, even though ETW is currently trading at a slight premium to NAV. We would advise a savvy investor to buy in small chunks and layer in while building an exposure to ETW, with volatility bouts being excellent exposure adding points.

CEF Metrics

This section details some CEF metrics and overall fund analytics:

Leverage Ratio: 0%

  • Buy-write CEF, with no leverage employed.

Expense Ratio: 1.10%

  • Average in the buy-write space

Manager: Eaton Vance

Yield: 7.84%

  • Average for the asset class.

Discount/Z-Stat: 2.38%/0.91

  • The fund is trading at a premium.
  • The premium is average given statistical data about this fund

Option Strategy

  • The fund currently writes options on 96% of its underlying portfolio
  • The average option tenor is 2 weeks
  • The fund writes slightly out of the money call options

Holdings

Coming from the Eaton Vance product suite, the fund has an international focus, with large European and Asian segments:

ETW geographic mix

Source: Eaton Vance

The top-10 holdings contain some of the familiar FAANG stocks but also a number of international bellwethers:

ETW top 10 holdings

Source: Eaton Vance

Nestle, ASML Holding, LVMH and Roche are international names not usually found in U.S. focused buy-write funds. However the fund is overweight technology as a sector, similar to what we have seen in other Eaton Vance buy-write products:

GICS sectors vs MSCI Europe Index

Source: Eaton Vance

Performance

In 2021, ETW has actually outperformed one of its more famous peers from the Eaton Vance fund family, namely the Eaton Vance Tax-Managed Buy-Write Opportunities Fund (ETV):

ETW vs ETV

Source: Seeking Alpha

We can see from the above graph that not only has ETW outperformed ETV, but it also had a better return than the S&P 500 for the first half of the year. We expect a slight outperformance here in 2022 with international stocks having more upside in our mind versus U.S. peers.

ETW performed very robustly during the past Fed tightening cycle, with a 38% total return during the 2013-2015 time frame:

ETW vs SPY

Source: Seeking Alpha

The fund only lost money in 2018, driven by the violent year end market sell-off:

ETW fund total return

Source: Author

ETW also has a stable performance, with a minimal amount of months with negative total returns:

ETW fund months with negative total returns

Source: Author

Market Price vs. NAV

The fund tends to trade at a slight premium to NAV:

ETW fund NAV and price

Source: CEF Connect

We can see from the above graph that ETW only swings to modest discounts to NAV on the back of significant market sell-offs (i.e. 2018 or the 2020 COVID crisis) and gradually pulls back to prices close to the fund NAV. The vehicle is to be avoided when the premium increases substantially versus historic levels (i.e. more than 4% premium to NAV).

The fund does not utilize its principal/NAV to boost its yield, with a very stable NAV performance in the past 10-years:

ETW fund price vs NAV

Source: CEF Connect / Author

Some CEFs tend to market themselves by exhibiting eye-popping yields which are not supported by the underlying strategies / cash-flows. This usually results in NAV erosion throughout time. ETW does not fall in that category and a stable NAV performance in the past decade is the sign of a robust buy and hold vehicle.

Distributions

ETW utilizes a mix of realized option premiums, investment income and capital gains to compose its dividend yield:

ETW fund capital gains

Source: Eaton Vance Section 19-a Statement

The fund has a very stable dividend distribution history, with the management team doing a good job of providing stability through the CEF structure:

ETW fund distribution

Source: Author / Eaton Vance

Conclusion

A buy-write fund from the Eaton Vance family, ETW, exhibits solid historical performance with strong risk/reward metrics and trailing total returns. Having posted a robust positive performance during the last Fed tightening cycle, ETW is well suited to take advantage of what many analysts are anticipating to be a volatile 2022. We like this fund from the Eaton Vance buy-write suite for its international exposure and we are Bullish, even though ETW is currently trading at a slight premium to NAV. We would advise a savvy investor to buy in small chunks and layer in while building an exposure to ETW, with volatility bouts being excellent exposure adding points.