Key Points
- Different Closed End Funds, by design and marketing, are intended for certain primary demographic markets, and any spillover to other markets is a bonus.
- In general, conservative investors, who are usually more income oriented and less risk averse, prefer simpler fund structures than younger investors, who are more readily open to complex designs and riskier assets.
- In comparing funds like BSTZ and QQQX, the question of which is “better” is likely more answerable as which is “better for which demographic”, based on their respective designs and operations – but that does not preclude cross-marketing.
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Different Strokes For Different Folks
Sly and the Family Stone’s #1 Billboard Chart hit, “Everyday People” introduced the lyric line, “Different strokes for different folks” into the lexicon of everyday conversation.
Sly and the Family Stone were a disruptive force in the music industry in the 1960s. It was the first multiplatinum selling band to defy categorization, as its multiethnic members fused R&B, Gospel, Rock & Roll, and Jazz elements into both hit singles and albums. They broke the color barrier, sold records to people of all races, and even performed at Woodstock.
The songs of Sly and the Family Stone viewed the world through a spirit of human connection, and color blindness, much in the spirit of Dr. Martin Luther King’s dream about “being judged by the content of one’s character instead of the color of their skin. Their 1968 Billboard #1 hit single, “Everyday People” is still one of the most recognized songs of the era, and it put the term, “different strokes for different folks” into common vernacular.
“Different strokes for different folks” is a term that is pretty much applicable to all people from all walks of life regarding personal preferences. As such, this extends to investments as well. Since Closed End Funds (CEF) come in all manners of configurations to suit investors of all backgrounds and risk tolerances, it can be difficult to objectively compare two (2) disparate types that are geared for totally different markets. Case in point: TheBlackRock Science and Technology Term Trust (NYSE: BSTZ)and theNuveen NASDAQ 100 Dynamic Overwrite Fund (QQQX).
Polar Opposites
BSTZ and QQQX are very different CEFs intended to be marketed to very disparate demographic investor groups.
On the surface, BSTZ and QQQX are as different as can be. Although both CEFs derive their dividends from a covered call strategy and trade at a discount to NAV, that is where the similarities end:
BSTZ is a limited term technology CEF that has metamorphosed into a de facto private equity technology fund with a double-digit dividend, thanks to the clout of issuer BlackRock and its $12.5-15 billion AUM, the largest manager on the planet.
QQQX is one of the oldest covered call funds, with inception in 2007. It tracks the Nasdaq 100 Index, and delivers a consistent dividend as well. It is issued by Nuveen, which was founded in 1898 as a municipal underwriter, and has weathered the Wall Street roller-coaster for 127 years.
A side-by-side comparison of the two appears as thus, based on market price at the time of this writing:
Category | BSTZ | QQQX |
Yield | 11.57% | 8.15% |
Average Option Coverage | 30-40% | 56% |
Mkt. Price/NAV | $22.55/$24.57 | $27.49/$29.95 |
Premium NAV discount | -8.22% | -8.21% |
Average Daily Volume | 244,173 shares | 117,246 shares |
Number of Securities | 82 | 206 |
Net Assets | $1.689 billion | $1.423 billion |
Expense Ratio | 1.48% | 0.89% |
1-Year Return | 29.45% | 19.66% |
3-Year Return | 14.85% | 18.44% |
5-Year Return | 6.15% | 11.03% |
Crossover Potential
There are ways to cross market investment products to other demographics apart from their primary ones, in much the same way Sly Stone and Prince were able to do so in the music industry to multiplatinum success.
The pioneering records of Sly and The Family Stone provided the music industry with one of the most audacious examples of how cross-pollination of genres could become commercially successful, by selling millions of records to both rock and R&B fans alike, along with jazz aficionados. This was a template that would be later followed to mega platinum success by Prince.
BSTZ was created for technology minded investors. The covered call dividend strategy was likely intended as a risk offset, since technology is historically a very volatile sector. Dividends became even more crucial for risk mitigation as BSTZ became more deeply enmeshed in investing in private technology companies like TikTok parent Bytedance, AI firm Databricks, and pre-IPO companies like Klarna. Their private status and relative illiquidity compared to publicly traded stocks are usually the sole province of institutional investors, so BSTZ’s private sector tech exposure has since become a cache with Gen-Z investors.
QQQX is very much akin to other Nasdaq 100 ETFs and CEFs, with the added conservative dividend kicker for income purposes. Its steady growth record, combined with its solid income component, has made it appealing to retirees and investors who avoid rolling the dice on their holdings.
That said, there are some opportunities for cross-marketing demographically between both CEFs.
- BSTZ can emphasize the BlackRock imprimatur of safety. With a name synonymous with the “biggest asset manager on the planet”, the risk concerns can be addressed through the sheer magnitude of BlackRock’s war chest trillions.
- BSTZ’s double digit yields can certainly appeal to income-focused retirees.
- While BSTZ does have a 2031 expiration in its charter, that expiration is subject to an extension with an option of conversion to perpetuity. The latter would appear to be a strong possibility, since BSTZ has zero imitators and its unique appeal to Gen-Z tech fans make a strong case for BlackRock to keep it as a solid money maker. This would easily rebut the concerns from retirees who might worry about losing their investment. In reality, the expiration term could be likened to a callable municipal bond.
- QQQX recently was reportedly considering changing its distribution period from quarterly to monthly, to better compete with rivals like YieldMax.
- Unlike some other covered call Nasdaq 100 ETFs, QQQX’s conservative approach and more modest dividend has allowed it to grow without negative impact to NAV – its 10-year ROI calculates within roughly $5,000 of the Nasdaq 100 Index directly, while the dividend yield has solidly paid out the entire period. This can appeal to Gen-Z who got their first taste of a bear market this past April and may realize they aren’t as daring as they thought.
There is certainly nothing wrong with “Different strokes for different folks”, and there are obviously some designs of investment vehicles that are better for some markets than for others. However, like Sly Stone and Prince, there are ways to appeal to both camps, so bridging a “never the twain shall meet” chasm can be accomplished with the right approach.
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