I am a big fan of the buy write index and put write index and have been for a while. I own some shares of the PowerShares S&P 500 Buy Write ETF (PBP) and I use it for some clients where for whatever reason 40 stocks is not the best answer.Over the years I have many posts about buy write and put write indexes and products. The idea behind both is a smoother ride to a better long term result with the expectation it will lag when the regular S&P 500 goes up a lot. Every back test I have ever looked at and as I have been following them I have to say I am convinced they deliver as advertised. The chart is for one year and shows both PBP and PUT down by quite a bit less than the S&P 500.
PBP has been around a little over a year. It has started slowly but the average volume is now 67,000 shares--not great but not impossible either. For now there is no ETP to track PUT but I hope there will be. In my opinion these indexes offer an easy way to manage volatility with a strategy that might be easier to understand. In the context of building a diversified portfolio that is simple in an increasingly complex world I think there is plenty of meat on this bone.
The reason for the post was an email I received with this link to a recent study on the put write index.
A couple of these types of things carefully selected along with a couple of absolute return products and a couple of hot potato themes might make for an effective portfolio mix.
17 comments:
I have a good percentage of my U.S. equity allocation in PBP. I like the smoother ride. My only complaint is the spread. Multi-percent spread most of the time. It stinks when you're easing into it bits at a time. As you mention, the volume is increasing, so I hope the spread will decrease.
I also like to hit some BEP when the discount to NAV is particularly high which is often the case on big downward legs.
A couple of people asked about updates for all the portfolios I track a month or 2 ago.
Here's the portfolio update with 2008 results. I've added the permanent portfolio and a Rick Ferri portfolio.
Assuming that buy write is in the context of the equity portion of your portfolio, it's hard to argue with the numbers. On the other hand, if one adds AGG (as one bond example) to your chart, it does a far better job of achieving your over-arching goal than PBP during the period in question.
Like Bill B, I was in BEP but sold my position when it was clear that being down less was making me very uncomfortable.
Thank you Stephen. Much appreciated.
i think of pbp as an equity proxy
Stephen
Thank you for such a comprehensive report, and for free!
Roger - To me the absolute return space completely failed. Many (not all) hold themselves out to be bond alternatives libor +3 or so with similar volatility.... This obviously wasnt the case. (We can go into why in a much longer article - I beleive whenever you measure a securtiy by the way it acts rather than what it actually consists of you are asking for "deviation" haha) I know your reaction is "expectations of what a security has to offer" and owning a "small peice" so that if it blows up you aren't destroying your portfolio. I agree. But to me, this was a complete failure of investment objective. Yes nothing worked (save cash, sort of) in Q3 & Q4, but you anticipate such reactions from equities and bonds. FYI - I don't consider the put/call writing strategy in absolute return...I'm specifically talking about fund of funds and the like that held themselves to be absolute return. I use GATEX (Gateway) for my Put/Call - since they are one of the few that actually do the Put part.... Anyway, thank you for all of you time and thoughts.
This would seem to bear your idea out, though it's not end of year results. You can even see performance by category.
OTOH, isn't losing, say, 8% in 2008 considered a win?
John, failed to a point yes. there were some that worked well, maybe just as a function of luck.
one thing to ponder is whether this bear market is in fact different. not in terms of the world ending but in terms of how many segments were hit so hard. i feel confident that this is an appropriate question but i don't think we can begin to know the answer until the event is over.
Hmmm...sort of a Black Swan allocation strategy?
Here's a question. If you are a mostly passive investor anyway, then why use buy-write and not just the index benchmark ETF, like the SPY?
I like the idea of buy-writes, but let me be the Devil's Advocate for a brief moment. I'd like to overcome the devil inside of me and buy some for my portfolio. :-)
You may perform better in bear markets with the buy-writes (or so we assume), but you'll under-perform in a bull market (assumed as well). Since "historically" we have more bull markets than bears, wouldn't this be detrimental to long-term returns?
The risk adjusted returns in buy-writes may be better, but you can't eat risk. As long-term investors (mostly buy and hold type), you accept volatility as long as the risk of ruin is near zero. And since the buy-writes still have a majority of the downside risk anyway, is it really the best investment?
And you have manager and trading risks on top of the benchmark risks. (see the $BXM.X index versus the BEP and PBP, both under-performing the index). The volume is also low in buy-write.
If you go under the assumption that the SP is not likely to go to zero, and very likely will make new highs again at some future date, then wouldn't the simpler benchmark index be a better decision.
And sure, you can be at an age that you should try to have lower risk in the portfolio (say 55), but it seems you can do that by just having more cash, and other more stable asset types.
And who is to say buy-write won't for some stretch severely under-perform the benchmark index in a bear market as well? The history of the buy-writes ETF is very short. Look at the BXN versus the NDX. And even the BXR versus the RUT. Some managed buy-writes such as ETB really have done poorly even at a 13% dividend yield. Look back at ETB since 2005 versus the S&P 500 Index. Not only under-performing the benchmark, but at significantly higher volatility.
With the PBP and BEP, the difference in returns versus the benchmark may just be where you start the comparison in time.
And what if we go into a very long-term environment where selling option premium is not very lucrative? I'm saying there are many more risk variables to consider.
Is the easy way out to say, hey it can't hurt me and it could help, and add 3% exposure of it to your portfolio and see if the idea sticks? If you wouldn't do something with 50% of the portfolio, then should you do it with 3% even if the allocation is so small it won't make a difference. Too many of these 3% sub-optimal decisions can be a big drag on overall compounding performance of any net worth.
Okay, that was the Devil speaking. I still like the idea of buy-write.
Seems to me that the buy-n-hold equivalent might simply be a more conservative portfolio.
Mr. Risk, if you look at the back test for each, actually not even a back test it is the real thing, you will see that it does not lag in bull markets it lags up a lot, there is a difference. over the entire cycle it has outperformed with less volatility. no guarantee it does that in the future.
Because the underlying index is only reset once a month with the market being so volatile PBP will much of time either be at a 100 or 0 delta close to expiration leaving its performance more up to chance should a very big move happen. The spreads remain high much of the time and can also trade above or below NAV which sets up an easy arbitage for the specialist. I would stick with GATEX for a long term hold and use SPY and SPY options for specific situations (put on buy writes after a sell off to take advantage of high volatility or sell calls against SPY after an up move)
Roger,
I am a avid reader and respect your thoughts. Obviously 2008 was a bad year for everyone. I know you had some in cash, but still had most in equity. Have you calculated what your losses were for the year by %?
anon, thanks for being an avid reader but i guess you're not an avid video watcher? if you watch last weekend's video you should get a sense.
Nice article -- and thanks for the link to the EnnisKnupp study. Hope you'll check out my blog and consider adding it to your Blog List.
Regards,
Jeff
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