As investors peruse the exchange traded fund universe in their ongoing search for income-generating opportunities, some have stumbled upon a buy-write ETF and its attractive double-digit yields.
Powershares S&P 500 BuyWrite Portfolio ETF (PBP) offers an impressive 10.25% 12-month yield. The ETF is based off the CBOE S&P 500 BuyWrite Index. It will hold 80% or more of its assets in common stocks of the 500 companies on the S&P 500 Index and writes, or sells, call options. Specifically, the fund sells one-month at-the-money S&P 500 call options against the portfolio at regular intervals. PBP has a 0.75% expense ratio.
The buy-write, or covered call, strategy utilizes call options on a position to generate robust income from option premiums. The trader will only lose money if the market price of a stock rises above the exercised price upon maturity of the option, which tends to occur during quickly rising markets.
An investor would sell a call option above the current price of a security. If the price of the security is below the option upon the expiry date, the investor would pocket the difference. Essentially, a buy-write helps provide a cushion from the downside.
Additionally, investors may look at the iPath CBOE S&P 500 BuyWrite Index ETN (BWV), which also tracks the CBOE S&P 500 BuyWrite Index. Investors, though, should note that this is an exchange traded note, which is an unsecured debt obligation subject to the credit worthiness of the issuing bank.
However, in the current up trending markets, the buy-write strategy has not been as spectacular. The PBP has gained 7.0% and BWV rose 6.4% year-to-date, compared with the 14.0% increase in the S&P 500.
Max Chen contributed to this article.
Disclosure: I am long PBP.
Additional disclosure: Tom Lydon's clients own PBP.