Covered Call Funds: Like Everything, Good in Moderation

Roger Nusbaum submits: The NY Times had an article about the covered call funds that were all the rage for a while and that I wrote about quite frequently in late 2004, early 2005 and a couple of times since. Like most articles on the topic the focus is on the various flaws and why this is not the right strategy for most folks.

I think my take on these has been sort of unique. The concept also has plenty of proponents as well as detractors. While I do buy into the concept, I have urged moderation every step of the way. Most clients own one of these funds anywhere from 2%-4% of the portfolio. I do not think the strategy or the various funds that invest this way will blow up, but at 3% there is not much reason for me to devote too much time to worrying about it.

I had owned Madison Claymore Covered Call Fund (MCN), but I swapped it a short while back for Blackrock Global Opportunities Equity Trust (BOE). The reason for the swap was to maintain the same general effect but have this kind of holding spared (hopefully) if the U.S. economy does go into a recession. Since the swap the two have moved in lockstep. If the economy never goes into recession again the two should trade similarly more often than not, I think.

On a related note European index provider Stoxx Limited just listed the Dow Jones Stoxx 50 BuyWrite Index. The general intention is to create an ETF to track the index. This is something I touched on a few days ago. I think in the next couple of years we will see ETFs on the various buy-write indices, foreign and domestic. And if they do come I'll urge the same moderation.

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