A while back I wrote an article about two new buy-write index funds, FFA and MCN. These closed end funds invest in the S+P 500 index but the managers sell covered calls in addition to owning the index. The buy-write index offers the potential for out performance in all market environments except up a lot.
Since I first wrote the article I have added MCN to my wife's Roth IRA and have bought it for clients as a fixed income surrogate. Both MCN and FFA have very high yields but because the underlying is common stock and not bonds I expect both of them to be less sensitive to a rise in interest rates. Let me stress I expect less interest sensitivity, not no interest sensitivity. FFA yields about 10% and MCN yields about 8%. I picked MCN because I am more familiar with the company, Claymore Advisors, that manages the fund.
The reason I am posting about this is that I stumbled across an excellent article from Index Universe.com, that describes and defines the buy-write index very well. Its worth exploring.
The Australian Stock Exchange (ASX:XBW) also has a buy-write index but I have not yet found a way for US investors to access it. If anyone knows more about how to invest in this please let me know.
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5 comments:
Love the covered call strategy, especially on volative stocks. Can really juice returns in a sideways market, but can be frustrating in a strong bull market like 2003. Could be a very good strategy in the years to come if the prognostications about 4-6% returns prove true.
1. With volatility indices near multi-year lows is it really the right time to expect outperformance by selling vol?
2. Why aren't stocks interest rate sensitive? Isn't equity just the levered tail that is leftover once bond investors get paid back?
Michael,
Well, those are great questions.
Your Question #1) I mentioned in the article I use as a surrogate for part of my fixed income exposure(my clients have a 2%-3% weight in MCN). I clearly don't expect a 30% lift in the price of MCN if SPX goes up that much. The low VIX and VXN, I believe are not as low as they seem. I wrote about this back in Oct.
Your Question #2
Some stocks are more interest sensitive than others, obviuosly, but as an asset class bonds tend to have more sensitiveity to interest rate increases than stocks do. Also as money rotates out of bonds it may rotate in to equities, at least some of it will.Over the lst couple of years as the ten year yield has moved up some, so have equities.
PS I emailed this reply with a couple of links that don't work in the comments function so....
http://randomroger.blogspot.com/2004/10/deconstructing-vix.html
http://finance.yahoo.com/q/bc?s=^TNX&t=5y&l=on&z=m&q=l&c=vbltx,^GSPC
Interesting strategy. Thanks for the blog entry, I've got something to research over the weekend...
Roger....I'm a new time viewer and retiree. Your comments on Covered Call CEF's was interesting. As a retired teacher, I am looking for fixed income sources. Do you have any recommendations on other CEF's suched as muni, REIT, preferred, emerging market CEF's that payout higher dividends, and some of the pluses & minuses with these?
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