• Thu. Dec 3rd, 2020

Dimancherouge

Technology

BlackRock Science And Technology Trust II: 8% Discount, 4.5% Yield, Pays Monthly (NYSE:BSTZ)

BlackRock Science And Technology Trust II (BSTZ) is a limited-term closed-end equity fund. BSTZ began operations in June 2019 with the investment objectives of providing total return and income through a combination of current income, current gains and long-term capital appreciation.

Under normal market conditions, the Trust will invest at least 80% of its total assets in equity securities issued by U.S. and non-U.S. science and technology companies in any market capitalization range, selected for their rapid and sustainable growth potential from the development, advancement and use of science and/or technology.

When we last covered BSTZ, in early June, it was at $21.47. Just like the broad tech sector, it went on a summer tear, gaining 23% over the last 10 weeks, with a total return of 24.41%:

Both BSTZ and its sister fund, BlackRock Science And Technology (BST), have vastly outperformed the S&P 500 over the past month, quarter, year, and year to date.

BSTZ is up 28% year to date, a bit more than BST, which is up 26.78%, while both have lagged the Nasdaq 100, as tracked by QQQ:

BSTZ had 22% of its assets overwritten with covered calls, as of 6/30/20. There were 114 holdings, no leverage, and the gross expense ratio was 1.30%:

Distributions:

At $26.41, BSTZ yields 4.54%. It pays monthly, generally going ex-dividend in the second week of the month, and paying at the end of the month.

The monthly payouts have been steady, at $.10, since they began, in September 2019:

(BSTZ site)

Taxes:

Although it generates income from capital gains and covered call writing, as of 7/31/2020, the 2020 distributions have been from 100% return of capital. ROC can be advantageous if you’re looking to defer taxes, but be aware that it also decreases your tax basis, which will be commensurately lower when you sell your shares:

(BSTZ site)

Holdings:

The fund has benefited from the tremendous 2020 price gains of its three top holdings – Tesla (NASDAQ:TSLA) up 380%, Shopify (NYSE:SHOP) up 160%, and Twilio (NYSE:TWLO) up 154%. Of course, the covered calls it wrote on these holdings would have created extra income, but also would have lessened the fund’s participation in these huge upside gains.

Its 22% covered call position is actually lower than its target range:

“Under normal market conditions, the Trust intends to write options with respect to approximately 30% to 40% of its net assets, although this percentage may vary over time with market conditions.”

(BSTZ site)

The fund’s top sector is Tech, at ~60%, followed by Communication Services, at ~13%, Consumer Cyclical, at ~9%, Healthcare, at ~4%, and Consumer Defensive, at ~3%:

BSTZ has broader geographical exposure than BST, with just ~43% in US holdings, vs. 59% for BST. Its holdings in China are similar, 13.43% vs. 12.28%, while its holdings in Brazil, Japan, and South Korea are much higher than BST’s.

(BSTZ site)

While it holds ~57% in large caps, vs. 81% for BST, BSTZ also has significant mid cap and small cap exposure, at ~28% and ~16%, vs. just 12% and 10% respectively, for BST:

(BSTZ site)

Pricing:

At $26.41, BSTZ has a -7.75% discount to its NAV/share, which is much deeper than its one-year -4.1% discount, but not as deep as its six-month -8.71% discount, which included the huge -21% discount during the March market lows. Its biggest premium to NAV was 11.57%, soon after its 6/25/19 IPO.

Returns:

The fund has racked up some strong returns during its brief history, with an NAV return of ~45% over the past year, a six-month NAV ~35% return, and a three-month 37% NAV return, as of 7/30/20. Notice how the price returns have consistently lagged the NAV returns – therein lies the opportunity to buy at a discount to NAV.

The trick with buying CEF’s is to acquire them at a deeper discount to NAV than previous averages. Since this is a new fund, under one-year-old, there’s not a lot of history to go on yet.

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Disclosure: I am/we are long BSTZ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Disclaimer: This article was written for informational purposes only, and is not intended as personal investment advice. Please practice due diligence before investing in any investment vehicle mentioned in this article.

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