The latest in the Harvard Management Company saga has some alumni from the class of 1969 suggesting they get rid of the hedge funds and put half the endowment into the Vanguard 500 Index Fund (VOO). The big idea is simpler is better. Trying to find a simple but effective portfolio is popular all over the place, hence the term lazy portfolio, and something I have explored many times at Random Roger.

Buywrite is a strategy that has a seat at this table in terms of managing volatility. Buywrite refers to selling covered call options. There are a couple of indexes out there, BXM and BXY, to track, a few ETFs like the PowerShares Buywrite Portfolio (PBP) and Horizons S&P 500 Covered Call ETF (HSPX), several closed end funds (12 years ago there were many closed end funds) and the iPath Buywrite ETN (BWV). I've written about BWV a few times including here and here. At some point quite a few years ago I observed that BWV appeared to be the best vehicle for tracking the BXM which is the more popular of the two indexes which is positive, the negative is that it is an ETN. You can start at the CBOE learning more about BXM but basically the track record has strong upcapture with less downside. The upcapture over the last few years looks a little less appealing as the duration of the bull market has been so long. Buywrite is a full cycle product but we've not had a full cycle in a while.

The chart shows BWV against the S&P 500 since the ETN's inception. In it's lifetime it has captured 67% of the move higher. But looking closer it obviously went down less than the S&P 500 in the crisis and it took SPX many years to catch BWV and although counter factual, in a bull market of normal length, SPX may have never caught BWV. According to Morningstar, BWV's beta and standard deviation are quite a ways below the SPX especially for shorter time periods which makes sense but even at 10 years the numbers are attractive in terms of smoothing out the ride.

In trying to pair BWV with something that might add some some long term return that could possibly make up what was given up versus owning SPX, the second chart adds iShares S&P 600 Small Cap ETF(IJR) and iShares Core S&P Mid Cap ETF (IJH).

Way back when, in my brief stint at Fisher Investments, they talked regularly about mid cap offering something like 95% of the return of small cap with a fair bit less volatility. While I don't remember the exact numbers from back then the chart backs up the performance assertion and the respective Morningstar pages, IJR and IJH, corroborate the volatility idea.

A portfolio combining BWV and IJH favoring BWV (this is not recommendation!) could generate a better risk adjusted result than putting it all in VOO and perhaps even a better nominal result. One downside, there are many including the complexity of owning an ETN, is there is no global diversification and that matters. This could be overcome by adding one more fund, I would prefer an emerging market fund, but something that was a little narrower than iShares MSCI Emerging Markets ETF (EEM) which like all broad based products takes in the bad as well as the good.

Just as too many disparate holdings, including too much in hedge funds, has been problematic, so too would having to few holdings as the class of 1969 seems to want but this exercise is useful in terms budgeting volatility. I've written quite a few times about risk budgeting but potential volatility can also be budgeted such that a better long term risk adjusted result is created and I think buywrite exposure could help for someone who may not want full market beta.