Buy-Write ETFs: An Easy Way To Mimic A Covered Call Strategy

Includes: BWV, PBP
by: John Spence

More exchange traded fund firms plan to launch buy-write ETFs that provide investors with an indexed version of a covered call strategy.

PowerShares S&P 500 BuyWrite Portfolio (NYSEARCA:PBP) is the largest of the group by assets with nearly $100 million. It has an expense ratio of 0.75%.

The ETF invests 80% or more in S&P 500 stocks and sells or “writes” covered calls. Specifically, the fund sells one-month at-the-money S&P 500 call options against the portfolio at regular intervals.

The ETF is based on the CBOE S&P 500 BuyWrite Index. Buy-write strategies “provide option premium income that can help cushion downside moves in an equity portfolio, but buy-writes often underperform stocks in rising markets,” according to the CBOE. “Buy-write strategies have an added attraction to some investors in that buy-writes can help lessen the overall volatility in many portfolios.”

The iPath CBOE S&P 500 BuyWrite Index ETN (NYSEARCA:BWV) is an exchange traded fund that tracks the same index and is issued by Barclays. Also, AdvisorShares has filed paperwork to launch a global buy-write ETF.

PowerShares S&P 500 BuyWrite Portfolio is trailing the S&P 500 by a slight margin in 2011. The ETF “hasn’t exactly throttled the S&P 500, but it’s a decent conservative play that doesn’t grab a ton of press,” notes.

“The options generate income that can cushion against potential losses and boost funds’ annual payouts, both features that are attractive to many income-oriented investors,” reported earlier this year.

Buy-write strategies were popular as investors scratched for yield in the years leading up to the financial crisis and the funds provided some cushion during the market meltdown, but the record has been mixed since then, according to the report.

The funds “did what they were supposed to do in 2008,” said Morningstar analyst Cara Esser in the article. Since then, “the strategy hasn’t been spectacular.”

PowerShares S&P 500 BuyWrite Portfolio ETF

click to enlarge

Click to enlarge

Disclosure: None