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Summary

  • Using total returns for each fund we will identify their respective gains.
  • BuyWrite funds offer higher dividends.
  • The S&P 500 has had an average annual total return of 10.08% from 1926-2013.
  • Find out which fund type would best match this return.

I always appreciate reader feedback and learn almost as much from you as I do from researching articles. In previous discussions on BuyWrite funds, a reader posed a question similar to, why not just invest in the index fund itself? Today, we will answer that question.

We are going to compare the top two BuyWrite funds to a top dividend fund. These funds are the top funds by assets in their respective categories (not necessarily top performing across all indexes). All three of these ETFs focus on the S&P 500. For this discussion, we are going to keep our focus on that index to compare apples to apples. It is important to note that the two BuyWrite funds track their own respective indexes off of the S&P 500.

BuyWrites:

PowerShares S&P 500 BuyWrite Portfolio ETF (NYSEARCA:PBP)

Horizons S&P 500 Covered Call ETF (NYSEARCA:HSPX)

Dividend Fund:

SPDR S&P Dividend ETF (NYSEARCA:SDY)

I would like you to read over, or just quickly browse, my previous article on PBP. It contains a lot of analysis on the total return of that fund since inception. You can read it here.

Total Returns

We will begin by taking a look at the total return for all three funds. HSPX is relatively new so I have included two charts.

As seen from the charts above SDY significantly outperforms the BuyWrite funds.

Let's take a look at the historical performance of the S&P 500 Index. This chart includes dividend reinvestments for a total return.

Received from here. By visiting this link, these charts are available all the way back to 1926.

The above chart, with charts included in the link, tells me everything I personally need to know. The BuyWrite funds cannot match the long-term performance of a fund like SDY.

Dividend yields

Fund

Current Yield (TTM)

Expense ratio

PBP

6.93%

0.75%

HSPX

1.65%

0.65%

SDY

1.82%

0.35%

Data from Charles Schwab. Chart created by Nathan Buehler

PBP will perform better in a sideways market. However, I have never seen a longer-term S&P 500 chart that just moves sideways. It does offer a better dividend yield, but at the cost of share price appreciation.

HSPX, in my opinion, will outperform PBP over the long-term. However, its gains are capped at 15% per cycle (usually one-two months). There will be instances where the S&P 500 will rise more than 15% in a short period of time. In this case, SDY would rise the full amount and HSPX would be limited by its options strategy. When the market drops all three funds would fall at roughly the same rate.

Divergence

I always like to take a look at divergence and note it in my analysis for ETFs.

PBP

HSPX

(click to enlarge)

Courtesy of Google Finance

SDY

SDY performed the least favorably against its index. All three funds closely correlate to the moves in their respective indexes.

Conclusion

Thanks to readers like you I have changed my original thesis that PBP belongs in your dividend portfolio.

BuyWrite funds such as PBP offer attractive yield. But that yield is sporadic and unpredictable (see chart in original article). In a sideways market, it is your best option, but rarely do markets move sideways long enough to reap the benefits.

Both HSPX and PBP offer full downside risk exposure to the S&P 500, but limit your upside potential (PBP more than HSPX). Each fund also has a higher expense ratio than SDY.

As we can see from the historical chart, the average total return of the S&P 500 Index stood at 10.08% as of 12/13/13.

For these reasons, I recommend SDY for dividend yield and principal growth over the BuyWrite funds.

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Source: An S&P 500 Dividend Fund Vs. BuyWrite Funds