In crazy markets like these, you’re probably looking for exchange traded funds (ETFs) that protect you on some level, whether it’s by giving you income, protecting your principal or hedging you on the downside. In addition to the obvious safe-haven picks, something else awaits.
PowerShares S&P 500 BuyWrite Portfolio (NYSEArca: PBP) is an ETF that uses stock options to minimize your risk. A buy-write strategy is a strategy of writing call options on an underlying position to generate income from the option premiums, writes Investopedia.
In accordance with that strategy, PBP holds stocks from the S&P 500, then writes “call” options against the index, which is a form of insurance, explains Daren Fonda for SmartMoney. By selling those calls, losses in the market can be offset. [5 ETF Strategies You Can Use.]
This strategy helped this ETF beat the market in 2008 and capture most of the gains in 2009.
Fonda has a caveat: the ETF works best in slow-rising or choppy markets and may underperform in low volatility or periods of strong investor sentiment. There’s another buy-write ETF in addition to PBP: PowerShares Nasdaq-100 BuyWrite Portfolio (NASDAQ: PQBW):
iShares has a buy-write ETN: iPath CBOE S&P 500 BuyWrite Index (NYSEArca: BWV), as well.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.