ETF Chart of the Day: Buy-Write Strategies
March 5th 2013 at 10:09am by Paul Weisbruch, Street One Financial
Readers know that we spend quite a great deal of time talking about ETF/Index options flow in our reports on a regular basis in terms of how they translate to notable market color, so it seems fitting that today we highlight an actively managed ETF strategy that debuted last fall.
VEGA (AdvisorShares STAR Global Buy-Write ETF, Expense Ratio 2.01%) is designed to sell call options against underlying long positions in the fund in order to earn a consistent income stream from taking in the premiums from the call sales.
Not only does the portfolio manager of the fund (Partnervest Advisory Services LLC) sell calls methodically, but in times of low volatility (such as now for instance, with the VIX trading with a $14 handle), they will purchased protective put options as well to manage the overall risk in the portfolio. [New Put-Write ETF]
Currently, VEGA has about a 25% weighting to cash equivalents, with top equity long positions looking like the following (IYR 12.61%, SPY 12.58%, XLE 12.45%, DBP 12.42%, and EEM 12.37%).
Remember that one of the key tenets of the strategy is to simultaneously write, or sell call options against the equity (in this case ETF) longs in the portfolio and hold both positions.
In delving through the fund literature, the portfolio managers also aim to “harness volatility” which in their words “creates less dependence on markets for returns during market downturns. Volatility may allow investors to add to their return when options are not exercised.”
Being a newer fund to the marketplace as well as an unabashedly “actively managed” ETF strategy, as with most funds, institutional players may wait to see live performance data generated before making sizable portfolio allocations to VEGA, but the fund has attracted a bit over $17 million in assets under management since launching last September.
It is worth pointing out that PBP (PowerShares S&P 500 Buy Write Portfolio, Expense Ratio 0.75%), which debuted in 2007, has attracted more than $234 million in assets under management and remains a reasonably popular fund in the “Buy-Write” space, so as portfolio managers on the advisory level and institutional plans look for more advanced strategies that involve options such as these, more assets should gravitate to such funds.
PowerShares S&P 500 Buy Write Portfolio
For more information on Street One ETF research and ETF trade execution/liquidity services, contact Paul Weisbruch at email@example.com.