BlackRock Utility And Infrastructure Trust: An Option Player In The ETF Utility Space
I recently looked at UTG and UTF, leading readers to ask about BUI. BUI is BlackRock’s entrant into the infrastructure space. The biggest difference it offers is the use of options. I recently wrote an article reviewing two relatively long-standing infrastructure closed-end funds , or CEFs. My conclusion being that Reaves Utility Income Fund (NYSEMKT: UTG ) and Cohen & Steers Infrastructure Fund (NYSE: UTF ) are both good products, though UTF is trading at a wider discount at the moment. Readers of that article asked my take on BlackRock Utility and Infrastructure Trust (NYSE: BUI ), another option (that’s a pun, actually) in the space. What is BUI? BUI opened its doors in late 2011, meaning that it doesn’t have the longevity of UTG or UTF. In fact, it hasn’t really witnessed a major market correction yet, like the pain we all suffered at the turn of the century and more recently during the 2007 to 2009 recession. This is less of a knock than a piece of information to keep in mind. BUI isn’t doing anything outlandish, so it’s unlikely it would “blow up” in a downturn. Actually, just the opposite is likely to be the case, but that expectation is untested. That said, what does it do? As the name implies, like UTG and UTF, BUI invests in things like electric utilities, water utilities, pipelines, bridges, and other similar hard assets. These are the types of things we take for granted, but without which life simply wouldn’t go on as it had before. On that score, it does, indeed, deserve to be looked at with UTG and UTF. However, there’s a not too subtle difference here. UTG and UTF both make use of leverage. BUI does not. It enhances returns, specifically income, through the use of an option overlay strategy . This means two things: return of capital will always be an issue and the options it writes could provide downside protection in a bear market. One of UTG’s big bragging rights is that it has never used return of capital to support its distributions. They have always come out of income and capital gains. You can argue this doesn’t matter much so long as a fund isn’t using destructive return of capital over extended periods. For example, UTF has used return of capital in the past and in one recent year it was destructive (the net asset value went down at the same time as return of capital was being used to support the dividend). However, that was one year and UTF hasn’t used return of capital recently. But some investors are highly suspicious of return of capital distributions. And BUI has made use of return of capital every single year. Why? Because it writes options. Dividends and interest on debt fall into investment income. Capital gains fall into, well, capital gains. Option income isn’t either of those things and winds up getting shoved into return of capital. It hasn’t proven to be a bad thing at BUI, with the net asset value, or NAV, increasing from $19.10 a share at its initial public offering to $21.50 or so more recently. So, at this point, the issue of return of capital hasn’t been a big one and likely only matters if you have a personal issue with that type of distribution. Looking at options from a different angle, the premiums received can provide return during down markets. This protects an option writing fund’s returns to some extent from the full effects of a market decline. In the case of BUI, however, that’s more of an academic issue because the fund has yet to deal with a truly severe downdraft. So, in theory, BUI should hold up better than UTG or UTF in a downturn. But it’s worth noting that the use of leverage at these two funds is likely to result in notable underperformance during a bear market. Both funds, for example, lost more than 40% of their NAV value in 2008. A fact to keep in mind when you consider that options can also limit BUI’s upside because positions will get called away. So BUI should lag in good markets and shine in bad ones compared to UTG and UTF. How has it done? Looking at performance numbers, BUI has underperformed relative to UTG and UTF on an NAV total return basis over the trailing three-year period through May (BUI’s short history means that’s the furthest back this trio can be compared). Interestingly, however, over the trailing six months period, UTG is down 2.7%, UTF is up a scant 0.4%, and BUI is up roughly 1.8%. Although hardly a bear market, while UTG and UTF have struggled, BUI is beating them. BUI’s standard deviation goes right along with that. UTG and UTF have three year standard deviations, a measure of volatility, of 13.5 and 11.4, respectively. BUI’s standard deviation is a far more subdued 8.5% over that span. Looking at cost, UTG is trading at a small discount to its NAV and roughly in line with its historical price trends. UTF, meanwhile, is trading far more cheaply at an around 14% discount. BUI is trading at a discount of around 12%, nearly three percentage points more than its trailing three-year average discount. Investors looking for bargains should be interested in UTF and BUI. That said, if you are concerned about risk, BUI should have the edge (despite the fact that it hasn’t been stress tested by a deep downturn). Yield wise, BUI’s distribution is around 7.5%. That’s in the same area as UTF, but notably above UTG’s 6.3% yield. That said, it’s worth repeating that UTF and UTG use leverage to enhance yield, hopefully earning more in dividends than they pay in interest. BUI, on the other hand, generates income by selling options on its holdings, which generates return of capital, can limit upside potential, yet also helps to reduce volatility. And options are also cheaper to deal with, which is why BUI’s expense ratio is around 1.1%. Both UTG and UTF have to contend with interest costs, which push their expense ratios up to 1.7% and 2.2%, respectively. Who’s BUI for? Whether or not you want to purchase BUI really boils down to your concern about market volatility. If you think the markets are trading at premium levels and could be due for a correction, theoretically, BUI is probably the best choice out of these three funds. It also has the allure of trading at a noticeable discount, like UTF, if you prefer to buy on the cheap. And it’s the least expensive to own based on fees. All of that said, I still like UTG because of its longevity and the fact that it has never cut its distribution. But for risk-averse investors who don’t have an issue with return of capital, BUI is truly worthy of consideration. Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
