Nuveen Municipal Closed-End Funds

 

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Table of Contents

 

3

 

Chair’s Letter
to Shareholders

Dear Shareholders,

More than a year has passed since the World Health Organization declared COVID-19 a global pandemic in March 2020, resulting in a year of global economic recession, financial market turbulence and some immeasurable losses. Although the health crisis persists, with the widespread distribution of vaccines in the U.S. and extraordinary economic interventions by governments and central banks around the world, we collectively look forward to what our “new normal” might be.

With vaccine progress and economic stimulus providing real benefits to the global economy, markets continue to anticipate a strong rebound in growth, especially in the U.S., along with higher inflation. To extend relief programs enacted earlier in the crisis, the U.S. government passed $900 billion in aid to individuals and businesses in late December 2020. Another $1.9 tril-lion relief package was signed into law in March 2021 providing extended unemployment benefits, direct payments to individuals and families, assistance to state and local municipalities, grants to education and public health, and other support. Currently, Congress is working on an infrastructure spending plan, although its final shape and whether it passes remains to be seen. The U.S. Federal Reserve (Fed) and other central banks around the world remain committed to supporting the recovery by maintaining accommodative monetary conditions. However, as economies have reopened, the surge in consumer demand has outpaced supply chain capacity, resulting in a jump in inflation indicators in recent months. Whether inflation persists is a subject of debate by economists and market observers, while the Fed and other central banks believe it to be more transitory.

While the markets’ longer-term outlook has brightened, we expect intermittent bouts of volatility to continue. Markets are closely monitoring central bank signals, particularly if inflation remains elevated, as a sooner-than-expected shift to monetary tightening could slow the economic recovery. Additionally, COVID-19 cases are still elevated in some regions, as more virulent strains have spread and vaccination rollouts have been uneven around the world. The recovery hinges on controlling the virus, and estimates vary considerably on when economic activity might be fully restored and what level of public inoculation would be sufficient to contain the virus spread. On the political front, the Biden administration’s full policy agenda and the potential for Congressional gridlock remain to be seen, either of which could cause investment outlooks to shift. Short-term market fluctuations can provide your Fund opportunities to invest in new ideas as well as upgrade existing positioning while providing long-term value for shareholders. For more than 120 years, the careful consideration of risk and reward has guided Nuveen’s focus on delivering long-term results to our shareholders.

If you have concerns about what’s coming next, it can be an opportune time to assess your portfolio. We encourage you to review your time horizon, risk tolerance and investment goals with your financial professional. On behalf of the other members of the Nuveen Fund Board, we look forward to continuing to earn your trust in the months and years ahead.

Sincerely,

Terence J. Toth
Chair of the Board
June 22, 2021

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Portfolio Managers’ Comments

Nuveen AMT-Free Municipal Credit Income Fund (NVG)

Nuveen Municipal Credit Income Fund (NZF)

Nuveen Municipal High Income Opportunity Fund (NMZ)

Nuveen Municipal Credit Opportunities Fund (NMCO)

Nuveen Dynamic Municipal Opportunities Fund (NDMO)

These Funds feature portfolio management by Nuveen Asset Management, LLC (NAM), an affiliate of Nuveen Fund Advisors, LLC, the Funds’ investment adviser. Portfolio managers John V. Miller, CFA, Steve M. Hlavin, Paul L. Brennan, CFA, Scott R. Romans, PhD and Timothy T. Ryan, CFA discuss key investment strategies and the six-month performance of NVG, NZF, NMZ, NMCO and NDMO. Paul has managed NVG since 2006, Scott assumed portfolio management responsibility for NZF in 2016, John has managed NMZ since its inception in 2003, John and Steve have managed NMCO since its inception in 2019 and John and Tim have managed NDMO since its inception in 2020.

An Update on COVID-19 Coronavirus and its Impact on the Securities Markets

Vaccination progress across Western countries has been encouraging for the markets, although the spread of new variants of the COVID-19 coronavirus is being closely watched. Although the pace of vaccinations in the U.S. has recently slowed, half of U.S. states and Washington D.C. have fully vaccinated at least 50% of their adult populations as of May 2021 according to the Centers for Disease Control and Prevention. In other regions of the world, vaccine rollouts have been slower than expected. Nevertheless, there are more vaccines still in development, some of which have announced positive trial results, vaccine trials have begun for children and governments are looking to adjust rollout plans to speed and/or broaden distribution.

After moderating in late 2020, the U.S. economic recovery reaccelerated in early 2021 as vaccinations, reopening and federal stimulus checks encouraged consumer spending. Pledges from central banks and governments to sustain the recovery with policy support are underpinning positive economic outlooks for the full year and beyond. The U.S. government approved a $900 billion relief package in late December 2020 and followed with another $1.9 trillion stimulus plan in March 2021. The Biden administration has proposed a $2 trillion infrastructure improvement plan and a $1.8 trillion families plan investing in education, child care, paid family leave and other support, although the specifics of both proposals are expected to be highly debated in Congress.

Markets rallied on optimism for normalization in daily life and in the economy, furthering the recovery from the March 2020 sell-off. Although the detection of the virus in China was made public in December 2019, markets did not start to fully acknowledge the risks

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This material is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy, sell or hold a security or an investment strategy and is not provided in a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on an investor’s objectives and circumstances and in consultation with his or her advisors.

Certain statements in this report are forward-looking statements. Discussions of specific investments are for illustration only and are not intended as recommendations of individual investments. The forward-looking statements and other views expressed herein are those of the portfolio managers as of the date of this report. Actual future results or occurrences may differ significantly from those anticipated in any forward-looking statements, and the views expressed herein are subject to change at any time, due to numerous market and other factors. The Funds disclaim any obligation to update publicly or revise any forward-looking statements or views expressed herein.

The ratings disclosed are the lowest rating given by one of the following national rating agencies: Standard & Poor’s Group (S&P), Moody’s Investors Service, Inc. (Moody’s) or Fitch, Inc. (Fitch). Credit ratings are subject to change. AAA, AA, A and BBB are investment grade ratings, while BB, B, CCC, CC, C and D are below investment grade ratings. Holdings designated N/R are not rated by these national rating agencies.

Bond insurance guarantees only the payment of principal and interest on the bond when due, and not the value of the bonds themselves, which will fluctuate with the bond market and the financial success of the issuer and the insurer. Insurance relates specifically to the bonds in the portfolio and not to the share prices of a Fund. No representation is made as to the insurers’ ability to meet their commitments.

Refer to the Glossary of Terms Used in this Report for further definition of the terms used within this section.

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Portfolio Managers’ Comments (continued)

and potential economic impact until the latter portion of February 2020, when outbreaks outside of China were first reported. Global stock markets sold off severely, with the S&P 500® Index reaching a bear market (a 20% drop from the previous high) within three weeks, the fastest bear market decline in history. Even certain parts of the bond market suffered; below investment grade municipal and corporate bonds generally dropped the furthest, mostly out of concerns for the continued financial stability of lower quality issuers. Demand for safe-haven assets, along with mounting recession fears, drove the yield on the 10-year U.S. Treasury note to 0.5% in March 2020, an all-time low. Additionally, oil prices collapsed to an 18-year low on supply glut concerns, as shut-downs across the global economy sharply reduced oil demand, although oil prices have recovered to well above those lows.

Nuveen Fund Advisors, LLC, and the portfolio management teams are monitoring the situation carefully and managing the Funds to best pursue investment objectives while mitigating risks through all market environments.

What key strategies were used to manage the five Funds during the six-month reporting period ended April 30, 2021, and how did these strategies influence performance?

The Nuveen AMT-Free Municipal Credit Income Fund seeks to provide current income exempt from regular federal income tax and to enhance portfolio value relative to the municipal bond market by investing in tax-exempt municipal bonds that the Fund’s investment adviser believes are underrated or undervalued or that represent municipal market sectors that are undervalued. The Fund invests in municipal securities that are exempt from federal income taxes. The Fund uses leverage. By investment policy, the Fund may invest up to 55% of its managed assets in municipal securities rated at the time of investment Baa/BBB and below or judged to be of comparable quality by the Fund’s portfolio management team.

The Nuveen Municipal Credit Income Fund seeks to provide current income exempt from regular federal income tax by investing in an actively managed portfolio of tax-exempt municipal securities. Up to 55% of its managed assets may be in securities rated BBB and below at the time of purchase or, if unrated, judged to be of comparable quality by the Fund’s portfolio management team, and the Fund uses leverage.

The Nuveen Municipal High Income Opportunity Fund seeks to provide high current income exempt from regular federal income tax. Its secondary investment objective is to seek attractive total return consistent with its primary objective. The Fund invests in municipal securities that are exempt from federal income taxes; the Fund uses leverage. By investment policy, up to 75% of its managed assets may be invested in municipal securities rated, at the time of investment, Baa/BBB or lower by at least one nationally recognized statistical rating organization including below investment grade securities, or unrated securities judged by the manager to be of comparable quality. No more than 10% of the Fund’s managed assets may be invested in municipal securities rated belowB3/B-, or that are unrated but judged to be of comparable quality by the Fund’s portfolio management team.

The Nuveen Municipal Credit Opportunities Fund seeks to provide a high level of current income exempt from regular U.S. federal income tax and secondarily, total return. The Fund invests primarily in high yielding, low- to medium-quality municipal securities that, at the time of investment, are rated Baa/BBB or lower or, if unrated, are judged to be of comparable quality by the Fund’s portfolio management team. No more than 30% of the Fund’s managed assets will be in municipal securities rated CCC+/Caa1 or lower at the time of investment or unrated but judged to be of comparable quality. No more than 10% of the Fund’s managed assets can be in defaulted securities or securities of issuers in bankruptcy or insolvency proceedings at the time of investment. The Fund uses leverage and has a 12-year term with the potential to convert to perpetual.

The Nuveen Dynamic Municipal Opportunities Fund seeks to provide a total return through income exempt from regular federal income taxes and capital appreciation. The Fund invests primarily in municipal securities, the income on which is exempt from regular U.S. federal income tax. The Fund may invest in municipal securities of any maturity and credit quality, without limit in below investment grade municipal securities rated BB+/Ba1 or lower at the time of investment or unrated but judged to be of comparable quality by the Fund’s portfolio management team, and without limit in municipal securities that generate income subject to the U.S. federal alternative minimum tax (“AMT Bonds”). No more than 20% of Managed Assets can be in taxable debt obligations, including taxable municipal securities, and no more than 10% of Managed Assets can be in defaulted securities or securities of issuers in bank-

6

 

ruptcy or insolvency proceedings at the time of investment. The Fund uses leverage and has a 12-year term with the potential to convert to perpetual.

In the six-month reporting period, the municipal bond market continued to recover amid upgraded economic forecasts, additional fiscal stimulus and the Federal Reserve’s commitment to accommodative monetary policy. Municipal yields declined for most maturities, and the municipal yield curve flattened slightly. Credit spreads narrowed further as the municipal credit outlook improved and investors continued to seek higher yielding investments lower down the credit spectrum. Against this backdrop, municipal bonds had positive performance in the six-month reporting period. We continued to take a bottom-up approach to discovering sectors that appeared undervalued as well as individual credits that we believed had the potential to perform well over the long term. Our trading activity continued to focus on pursuing the Funds’ investment objectives.

NVG’s trading activity was relatively light during this reporting period, driven largely by the reinvestment of cash flows from called and maturing bonds and coupon income, net of Fund dividends and expenses. While the NVG’s average credit quality was unchanged during the reporting period, purchases were slightly skewed toward higher credit quality, given incrementally better relative value and the available opportunity set in the investment grade market at the time. High grade paper NVG bought included tax supported (Triborough Bridge and Tunnel Authority MTA Payroll Mobility Tax Bonds and Dormitory Authority of the State of New York Personal Income Tax Bonds), single- and multi-family housing bonds (issued in Colorado, Massachusetts, North Dakota and Minnesota), transportation (Harris County Toll Revenue and Maintenance Tax Bonds and Illinois State Toll Highway Authority Revenue Bonds) and utility (New York City Municipal Water & Sewer System and Georgia Transmission Corporation Pollution Control Revenue Bonds). NVG also bought lower rated investment grade and below investment grade issues for Puerto Rico sales tax revenue (known as COFINAs), New Jersey State Transportation Trust Fund Authority Bonds, EnergyHarbor senior debt (refinanc-ing), Denver Transit Partners LLC Eagle P3 Project Private Activity Bonds, Metropolitan Transportation Authority (MTA) Transportation Revenue Bonds (New York), Queens Ballpark Company LLC Revenue Bonds (New York), Family Life Academy Charter School Revenue Bonds (New York) and Tobacco Settlement Authority of Iowa (refinancing). Redemptions from NVG’s portfolio during this reporting period were mainly pre-refunded bonds, with some tactical selling across various sectors.

With interest rates lower and credit spreads recovering to near their pre-COVID-19 levels, NZF’s trading activity was relatively lighter during the six-month reporting period compared to the six months preceding this reporting period. Purchases were primarily driven by incoming cash from called and maturing bonds and, when needed, selling some very short dated pre-refunded bonds to make opportunistic investments. Given the tightness of credit spreads and lower overall yields on offer in the prevailing market, NZF tended to focus more on buying high grade bonds that offered liquidity and incremental spread. NZF added high grade, state general obligation (GO) bonds for Wisconsin and California, and a New York City GO. NZF also invested in mid-grade (A and BBB rated) credits including health care, transportation (toll roads) and New Jersey appropriation debt, as well as selectively added to below investment grade exposure with buys in Florida high-speed train Brightline, Puerto Rico COFINAs and health care. Some of NZF’s COFINAs exposure was bought as part of a rotation strategy that pared the Fund’s Chicago exposure, as spreads have contracted significantly for the Chicago bonds and upside performance appears more limited from here, and rotated into COFINAs. We also executed some tax loss swaps within the COFINA position. This strategy entailed selling depreciated COFINA bonds with lower yields and buying similarly structured but higher yielding COFINA bonds. We implemented this approach to enhance the Fund’s income earning capability and seek to make the Fund more tax efficient.

For NMZ, the proceeds from called and maturing bonds provided ample cash to reinvest in new opportunities. Some of the more prominent bonds redeemed during this reporting period included Puerto Rico Aqueduct and Sewer (PRASA), Brightline, Regional Transportation District of Colorado and Castle Oaks Metropolitan District (Colorado). There was no active selling for credit reasons in this reporting period. NMZ continued to buy bonds across its longstanding themes, including charter schools (California Crosspoint Academy), industrial development revenue (Hoover Industrial Development Board for U.S. Steel), real estate backed (Colorado Northfield Metropolitan District), a new issue for Brightline (Florida) to fund the completion of its next phase and Puerto Rico COFINAs. Buying was mainly in the new issue market, where there was more relative value on offer, as the secondary market has stabilized since the high yield sell-off early in the COVID-19 crisis.

7

Portfolio Managers’ Comments (continued)

NMCO was somewhat active in this reporting period, buying bonds across a diverse group of sectors and focusing on those credits that still represented good relative values and wider credit spreads. New purchases were made with coupon income and the proceeds from called and maturing bonds. NMCO continued to build a position in Puerto Rico GOs, where the credit outlook has improved, and participated in a new issue for Brightline after holdings in some older, lower coupon Brightline bonds were refunded. There were no notable sales from NMCO’s portfolio in this reporting period.

NDMO, which began operations in August 2020, completed its invest-up phase. The portfolio was fully invested during this reporting period, emphasizing longer duration and lower rated, higher yielding bonds (including lower rated investment grade, below investment grade and non-rated debt) for their higher income earnings and total return potential. NDMO reinvested the cash flows from coupon income and maturing bonds to stay fully invested.

NDMO managed the duration of its portfolio by shorting interest rate futures contracts. The interest rate futures had a negligible impact on the performance during the reporting period.

As of April 30, 2021, the Funds continued to use inverse floating rate securities. The Funds employ inverse floaters for a variety of reasons, including duration management and income and total return enhancement.

How did the five Funds perform during the six-month reporting period ended April 30, 2021?

The tables in each Fund’s Performance Overview and Holding Summaries section of this report provide the Funds’ total returns at net asset value (NAV) for the period ended April 30, 2021. Each Fund’s total returns at NAV are compared with the performance of a corresponding market index.

For the six months ended April 30, 2021, the total returns at NAV for NVG and NZF outperformed the return for the national S&P Municipal Bond Index. NVG and NZF outperformed the return for the secondary benchmark (the “Blended Index” composed of 60% S&P Municipal Bond Investment Grade Index and 40% S&P Municipal Bond High Yield Index), and NMZ, NMCO and NDMO outperformed the return on the S&P Municipal Yield Index. For the purposes of this Performance Commentary, mentions of relative performance comparisons are as follows: NVG and NZF (Blended Index), NMZ, NMCO and NDMO (S&P Municipal Yield Index).

The main factors influencing the Funds’ relative performance in this reporting period were yield curve and duration positioning, credit quality allocation and sector allocation. In addition, the use of regulatory leverage was an important factor affecting performance of the Funds. Leverage is discussed in more detail later in the Fund Leverage section of this report.

During the reporting period, yields fell across the shortest and longest maturities, but rose in the short-intermediate part of the curve. Given this dynamic, longer duration bonds generally performed the best. The Funds remained positioned with overweights to longer duration bonds, which was favorable to performance. Additionally, with short-term interest rates near zero, the Funds’ borrowing costs have been significantly reduced, the benefit of which accrued to the Funds’ earnings and total return.

Looking at credit ratings, lower rated and high yield bonds outperformed high grade (AAA and AA rated) bonds in this reporting period. The Funds were well positioned for the environment, with overweights to the lower rated, higher yielding credit categories and underweights to the highest credit qualities. NVG’s slight overweight to credits rated BBB and lower (and underweight to AAA and AA rated bonds) was a positive influence relative to the Blended Index, although an overweight to the A-rated category detracted somewhat. For NZF relative to the Blended Index, the overweight to the BBB rated category added the most, followed by an underweight to AAA rated paper, while an underweight to non-rated credits had a slightly negative impact on performance. Relative to the S&P Municipal Yield Index, NMZ, NMCO and NDMO benefited from their overweight allocations to below investment grade and non-rated bonds.

Sector positioning yielded mixed results during the reporting period. NVG’s sector weightings overall detracted relative to the Blended Index, mostly due to an overweight to the significantly lagging pre-refunded sector and sub-sector weightings in health care (hospitals) and transportation (commuter rail). NZF’s sector positioning resulted in a neutral impact relative to the Blended

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Index, as the contributors and detractors were balanced. The Blended Index’s outperforming sectors in this reporting period were industrial development revenue (IDR), tobacco, education, transportation, health care and dedicated tax, while underperforming sectors included pre-refunded, utilities and tax supported. Relative to the S&P Municipal Yield Index, NMCO outperformed in its overweight to the IDR sector, which was the best performing sector in this reporting period, and the Fund’s credit selection was also strongly positive within the sector. NMCO also benefited from an overweight to higher education, underweight to health care and underweight to tobacco. Although an underweight allocation to transportation detracted from NMCO’s relative gains, credit selection in the sector outperformed. NMCO’s Puerto Rico and Illinois exposures also added value due to strong credit selection. For NDMO, sector allocations detracted somewhat relative to the S&P Municipal Yield Index, largely due to its positioning in state and local GOs. Although NDMO was overweight in state GOs, it held an underweight in Illinois GOs, which was disadvantageous relative to the index because Illinois GOs outperformed. NDMO’s positioning within health care also detracted, as performance within the sector was dominated by the outperformance of lower rated health care credits, many of which are senior living/life care names. NDMO was overweight in hospital bonds but underweighted in senior living/life care bonds.

Individual credit selection contributed positively to the Funds’ performance. Virus-sensitive credits were particularly strong performers on credit spread recovery and a municipal credit outlook that improved with upgraded economic growth forecasts, economic reopening and vaccinations, and federal aid to state and local governments.

NVG benefited from holdings in tax supported bonds (state of Illinois, city of Chicago, Chicago Board of Education, Metropolitan Pier and Exposition Authority McCormick Place, State of New Jersey, American Dream megamall/entertainment complex, Puerto Rico COFINA and Birmingham-Jefferson Civic Center); utility (Energy Harbor common stock and bank-backed pre-paid gas bonds); other revenue bonds (3 World Trade Center, Baltimore Convention, Franklin County Convention); education bonds (student housing projects and lower-rated colleges and universities); and pre-refunded bonds (due to favorable yield curve/duration selection). Offsetting these contributors were lagging positions in transportation (due to unfavorable yield curve/duration positioning in airport bonds despite strong performance from New York MTA credits); tobacco (which performed well for the Fund but lagged versus the much stronger performance of the Blended Index’s tobacco sector); IDR (investor-owned utilities such as PPL Energy Supply and Poseidon Resources and economically sensitive projects such as NuStar, Iowa Fertilizer and Hunt Refining performed well but lagged slightly due to the Fund’s yield curve/duration selection); and housing (primarily state single-family housing).

NMZ’s largest individual contributors included American Dream, Brightline, Metropolitan Pier and Exposition Authority McCormick Place, Hoover Industrial Development Board for U.S. Steel and Puerto Rico Electric Power Authority (PREPA). NMZ’s position in Energy Harbor common stock was another top contributor, as the company reported strong earnings results, continued to distance itself from the predecessor company’s political risk and previous bankruptcy, and faced a more favorable policy outlook given greener policy initiatives in Washington D.C. Detractors were Pyrolyx USA Indiana LLC Solid Waste Facility Revenue Bonds and Provision Cares Proton Therapy Center (Tennessee) Revenue Bonds, but the losses were far outweighed by the positive contributors.

NMCO’s top contributors included Energy Harbor common stock, American Dream, U.S. Steel, PREPA, Baltimore Convention, Brightline, Illinois GOs, Chicago, Columbus (Ohio) Convention, Admiral at the Lake (Illinois) senior living facility and several airlines.

Adding the most value to NDMO’s performance were selections in plastics recycler PureCycle, American Airlines JFK Airport, Puerto Rico GO, Big River Steel, New York MTA, Brightline, American Dream, Colorado International Center Metropolitan District 8 Limited Tax GOs and Allegheny County U.S. Steel. Detractors had a very marginal negative impact. NDMO held California taxable GOs and Syracuse Carousel Center taxable bonds, which lagged as taxable municipal bonds underperformed relative to tax exempt municipal bonds in this reporting period. Additionally, during the invest-up phase, the Fund held temporary cash positions that were a relative drag on performance, given the market’s rally.

NVG, NZF, NMZ and NMCO own Energy Harbor common stock, acquired when holdings of certain municipal bonds issued by FirstEnergy Solutions were converted into Energy Harbor equity as part of the company’s emergence from bankruptcy protection. Over time, the Funds’ expect to sell these shares and reinvest the proceeds into municipal bonds. Other municipal bonds issued by FirstEnergy Solutions, now known as Energy Harbor, were reinstated, which the Funds still held in their portfolios.

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Fund Leverage

IMPACT OF THE FUNDS’ LEVERAGE STRATEGIES ON PERFORMANCE

One important factor impacting the returns of the Funds’ common shares relative to their comparative benchmarks was the Funds’ use of leverage through their issuance of preferred shares, reverse repurchase agreements, borrowings and/or investments in inverse floating rate securities, which represent leveraged investments in underlying bonds. The Funds use leverage because our research has shown that, over time, leveraging provides opportunities for additional income. The opportunity arises when short-term rates that a Fund pays on its leveraging instruments are lower than the interest a Fund earns on its portfolio of long-term bonds that it has bought with the proceeds of that leverage. This has been particularly true in the recent market environment where short-term rates have been low by historical standards.

However, use of leverage can expose Fund common shares to additional price volatility. When a Fund uses leverage, the Fund’s common shares will experience a greater increase in their net asset value if the municipal bonds acquired through the use of leverage increase in value, but will also experience a correspondingly larger decline in their net asset value if the bonds acquired through leverage decline in value. All this will make the shares’ total return performance more variable over time.

In addition, common share income in levered funds will typically decrease in comparison to unlevered funds when short-term interest rates increase and increase when short-term interest rates decrease. In recent quarters, fund leverage expenses have generally tracked the overall movement of short-term tax-exempt interest rates. While fund leverage expenses are somewhat higher than their recent lows, leverage nevertheless continues to provide the opportunity for incremental common share income, particularly over longer-term periods.

The use of leverage had a positive impact on the total return performance of the Funds over the reporting period.

As of April 30, 2021, the Funds’ percentages of leverage are as shown in the accompanying table.

 

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Refer to Notes to Financial Statements, Note 5 – Fund Shares for further details on preferred shares and each Fund’s respective transactions.