How Does BSTZ Pay Nearly Triple Treasuries? (11.9% Yield)

For the past century, dividends from stocks or bonds were primarily of interest to older, conservative investors who had made their money and were seeking principal protection and income. The concept of using covered call options against a portfolio for income has been a strategy deployed by hedge fund managers and traders for decades – but rarely deployed in collected fund structures, such as Exchange Traded Funds (ETF), Closed End Funds (CEF) or mutual funds. 

Covered Call Fund Income

Covered call options during bull markets are the primary dividend source for many of the new covered call oriented ETFs and CEFs.

In 2006, Invesco introduced the first covered ETF, the Invesco S&P Buy Write ETF (CBOE: PBP). Over the past few years, YieldMax premiered high dividend single stock ETFs based on the volatility of Magnificent 7 tech stocks (Amazon, Apple, Alphabet/Google, Microsoft, Nvidia, Meta Platforms/Facebook, and Tesla), and Bitcoin influenced stocks like Microstrategy.  The high yields have caught attention from wealth building minded investors who are using dividend compounding as a strategy to supplement capital gains. 

Compared to the current US Treasury 10-year Bond yield of 4.04%, double digit yields from these ETFs have become normal. However, this has often come at the sacrifice of Net Asset Value (NAV), and market price. 

For example, the YieldMax ETF for Microstrategy, YieldMax MSTR Option Income Strategy (NYSEARCA: MSTY) sports a distribution yield rate of 91.35%  at the time of this writing. Distributions are monthly. However, since its February 2024 inception debut at roughly $21, the stock price has fallen to the $15.50 region. In order to maintain the high dividends each month, MSTY has had to dip into its NAV in order to make up for any shortfalls. Given that the size of the premiums from the covered call options are contingent on a volatile bull market, their size and subsequent dividend income is considerably diminished when the market is flat or turns bearish, such as when Bitcoin prices fall in the case of MSTY. The result is that a good part of the eye-popping dividends from MSTY is actually a return of capital, meaning that investors are getting a portion of their own money back minus the hefty expense fees. This is the primary cause for the drop in its NAV. 

The BlackRock Approach

BlackRock’s $12.5 trillion AUM gives it the wherewithal to establish a presence in every financial platform, and BSTZ is an example of how it incorporates both a technology fund with a covered call strategy.

As the 800 lb. gorilla of global asset management funds, one would be shocked if BlackRock (AUM of $12.5 trillion) did not have a presence in the high-tech equities sector. But of course, it does: the BlackRock Science and Technology Term Trust (NYSE: BSTZ). BSTZ is a closed-end fund tasked exclusively with primarily buying share stakes in publicly traded US and non-US cutting edge technology companies. Actively managed, BlackRock’s BSTZ is open to stocks of any market cap if the underlying technology is deemed to have substantial growth potential. 

BSTZ has no qualms over stating up front that its strategy includes covered call option writing to augment its portfolio’s risk-adjusted returns. However, in contrast to MSTY, BSTZ offers its investors the following features over the same period of time from February 2024:

• Yield: 11.81% (payable monthly)
• Capital Gains: approximately +30% (price rose from $17 to $22.30)
• NAV Discount: -8.93% (NAV is $24.31)

Not only does BSTZ offer a yield exceeding 2X the 10-year Treasury Bond (nearly triple), but it boasts capital gains and a market price that is at a discount to NAV for added risk mitigation. 

The BlackRock Advantage

Unlike many other technology CEFs, BSTZ also owns shares of private companies, such as ByteDance, the parent of TikTok.

Thanks to its top-notch fund management, BSTZ selectively chooses which ones out of the 82 stocks within its portfolio against which to write covered calls, and then allows the overall portfolio to run on its bullish trend, accumulating capital gains.  BSTZ distributes available investment income and net short-term gains first. Only in the event that these sources are insufficient, will the fund distribute long-term capital gains and/or return of capital to maintain the set level, as needed. 

Additionally, BSTZ has both large and venture-capital stage private company stakes within its portfolio. Names such as ByteDance (parent company of TikTok), Swedish fintech company Klarna, and Databricks (IPO pending late 2025 -early 2026) all contribute to its capital appreciation initiatives. BlackRock’s extensive analytics research and deep pockets allows it to to strategically invest in these companies with a minimum of risk for CEF shareholders. 

With the combination of double digit yield, capital appreciation, and discount to NAV, BSTZ would seem to be an ideal consideration for any portfolio wanting to have its cake and eat it too. Of course, since it is heavily steeped in the technology sector, prudent regular monitoring should be exercised in case of any adverse news. The one caveat unusual to BSTZ is that its fund design came with a 12-year expiration term slated for June, 2031. Luckily, it is subject to renewal, so continued successful performance should ensure shareholders of consistent ongoing growth and income for at least the next half decade, if not longer.