BuyWrite ETN (BWV): A Buy -- If It Can Track The Index

Roger Nusbaum submits: A few days ago I wrote about the BuyWrite ETN (BWV) for RealMoney. My initial reaction is positive, but I do plan to give a couple of months before I make a final decision about buying it. If it can track the CBOE BuyWrite Index (^BXM), which I can't be certain of yet, I will probably buy it.

The chart compares the BuyWrite index with the market price and the NAV for the Madison Claymore Covered Call Fund (MCN) & (XMCNX), which is a fund I owned across the board, and a name I still have for one or two clients.

The charts of MCN and XMCNX are distorted due to its large dividend, but even factoring the distortion BXM looks to be less volatile on a short term basis.

If I end up buying BWX I can envision allocating 2% to it and pairing back the call writing CEF I use now to 2% for a total of 4% for some clients.

Relative to the way I allocate to these things 4% might seem a little high, but for now my take is that the CEFs, being actively managed, are riskier than an indexed product. There is no attempt to chase yield, no matter what the at the money call is trading for that is what is sold, period.

One item about BWV to point out is that it will not pay a dividend. According to a phone call to Barclays last week, any income derived within the fund will accrue to the NAV.

To be clear BWV, IMO, needs to prove it can track the index.

Comments

[JohnB:]

Very interesting new security!

Regarding the lack of dividends, I understand the fund will seek to retain its income so it may be treated as capital gains. Does that look like a safe tax treatment and will it pass muster with the IRS?

2007 May 30 05:14 PM

[Roger Nusbaum:]

Barclays thinks so of course but I have not found any commentary from disinterested third parties that feel likewise. I should also note that I haven't found any commentary that says Barclays is wrong either.

So basically no help here.

2007 May 30 07:26 PM

[Ralph F:]

If the accrued dividends can be treated as a capital gain, that alone makes it more attractive than the closed-end fund.

2007 Jun 02 06:06 PM