Too Clever By Half
The latest (hard copy) edition of the ETF Report came and covers a lot of ground on options-based ETFs like we talked about the other day; equity portfolios with some sort of option overlay like covered calls or collars as well as putwrite funds. There are more than I realized.
GLDI effectively owns GLD and writes calls (knew about that one), SLVO does the same thing with silver, FirstTrust has two actively managed ETFs, FTLB and FTHI that both own dividend stocks with a collar (FTLB) and just sells call options (FTHI), Horizons has a NASDAQ 100 covered call ETF and of course we have talked about PBP, BWV and HSPX as well as the putwrites; PUTW and the new RPUT.
In one of the articles was a quote from David Varadi from the QuantX series of funds which uses PBP and PUTW in one its ETF of ETFs (per the article). He talks about being able to manage volatility (I like the sound of that) by maybe being able to "skew the traditional 60/40 to something closer to 75/25 with less volatility than 60/40" using SPY. Sounds interesting but can it work?
Unfortunately, looking in four different places told four different stories. Over the last five years, Morningstar shows that SPY is up 78% while PBP was up 5%. Based on that, a 75% allocation wouldn't have come anywhere close to equally 60% in SPY. You'd have gotten much closer with BWV which returned 41% over the same period, but sill not quite there. Confusingly, the PowerShares website tells a different (better) performance story, getting a little under half the return of the S&P 500 on an annualized basis but both Yahoo and ETF Global are more inline with Morningstar.
This next Morningstar chart compares PowerShares QQQ versus the Horizons NASDAQ 100 Covered Call ETF (QYLD) since pretty close to QYLD's inception.
The Morningstar numbers appear to be a little worse but if you click through to the Horizons' website you will again see much different performance numbers. According to Horizons, the fund is very close to its benchmark the CBOE NASDAQ 100 Buywrite V2 Index which can be tracked on Google Finance as symbol BXNT. The Google chart goes back two and half years and shows QQQ up 53%, BXNT up 37% and QYLD up 6%. Yahoo Finance is more inline with Morningstar while ETF Global is closer to the Horizons data, closer but not exact.
I haven't known Morningstar to be wrong but maybe they are? A cause for the difference could be the yield. That would make more sense where QYLD is concerned. It pays a high yield; one source said 7% and another said 12%. As I have been writing this post the performance issues got increasingly complicated. This doesn't change the original point I had in mind, it might even enhance my point.
When it comes to the portion of your portfolio allocated to equity exposure, just keep it simple. Simple can mean broad based funds that just own stocks, narrow based funds that just own stocks or stocks outright. I would say to save the options fund for the alternative sleeve of your portfolio, that is if you even believe in alternatives. Many of these option overlay products perform more like alternatives as I see it. Equity markets go up the vast majority of the time, better to capture that with a simpler product and then hedge in modest proportion around that simple exposure. Taking the PowerShares' site performance info as correct, the return is still less than half of the S&P 500 over a multi-year period. That is a lot of return to give away looking for something sophisticated.