Recently, I have found myself going down the rabbit hole leading to ETFs and closed-end funds (CEFs) that use covered call strategies. These funds offer the promise of investment exposure to major asset classes or indexes, plus a high level of dividend income.

Closed-end funds aren’t generally my cup of tea as many remain murky in details and often the payments are comprised mainly of return of capital.

Today, let’s look at the Nuveen Dow 30S Dynamic Overwrite Fund (DIAX).

My analysis for covered call strategy funds involves looking at three factors.

• What is the underlying portfolio or asset? This is often a popular stock index or a commodity asset, such as crude oil.
• How does the fund employ a covered call strategy? There are myriad ways to sell calls against the underlying assets. The focus can range from high current income to max capital appreciation with a small added income kicker.
• Review how the fund has performed relative to the underlying asset and on an absolute basis. A covered call strategy always puts a cap on upside potential. The trade-off will be a high current dividend income.

As the name indicates, DIAX, which is a CEF, has an equity portfolio that “seeks to substantially replicate the price movements of the DJIA”—the Dow Jones Industrial Average. The fund’s website shows the top 10 DJIA stocks in the portfolio and states the fund owns 34 securities, which accounts for 30 Dow stocks and some short index call options.

The DIAX call option strategy targets selling calls to cover 35% to 75% of the equity portfolio value with a 55% long-term target. The fund sells calls on the S&P 500 index with an average of two weeks to expiration. Strike prices are selected to a maximum of 3% above the current spot value.

The result of this options strategy lets the fund earn about half of the appreciation of the DJIA, while generating cash income from the call option selling.

So how has the fund performed?

DIAX currently yields 6.4%. Throughout its history, the yield has varied near 6%, plus or minus half a percent. Quarterly dividends are semi-fixed: they stay at the same rate for up to eight consecutive quarters.

For total returns, I compare DIAX to the SPDR Dow Jones Industrial Average ETF (DIA).

2021 year-to-date (through June 17):

• DIAX: 17.04%
• DIA: 13.45%

One-year total return:

• DIAX: 30.82%
• DIA: 32.37%

Since the DIAX inception on April 29, 2005:

• DIAX: 42.81% (jumps to 57.5% with dividends reinvested)
• DIA: 294.18%

Okay, that makes me want to look at the five-year returns:

• DIAX: 61.12% (70.29% with reinvestment)
• DIA: 108.13%

It appears that the DIAX covered call strategy does not give up much in the short to intermediate-term. Still, if you hold it for the long-term, in a strong bull market, a mechanical covered call strategy such as that used by DIAX will underperform significantly.

I have two covered call funds similar to DIAX, except they’re actually worth holding. One pays a variable dividend rate that’s been as high as 36% recently while the other pulls 12% dividend yields from tech stocks like AAPL, TSLA, and GOOG.