Last weekend, I attended the “Invest Like A Monster” conference hosted by Options Monster in San Francisco. Some of the biggest and brightest names in the trading business were including, John and Pete Najarian, Guy Adami, Jeff Macke and Howard Lindzon of StockTwits.
While at the conference, I had the privilege of moderating a panel on some new and exciting concepts in the exchange traded funds universe, including funds that offer unique avenues for downside protection and a couple that boost income through the use of covered calls.
Joining me on the panel were Joseph Cunningham of Horizons ETFs, Grayson Lipton of PowerShares and Kevin Rich.
Rich discussed the U.S. Equity High Volatility Put Write Index Fund (NYSEArca: HVPW) which his firm sub-advises for ALPS Advisers. HVPW is an ETF play on one of the more frequently used options strategies: Selling puts to generate income.
HVPW tracks the NYSE Arca U.S. Equity High Volatility Put Write Index that, as Rich noted, “creates its income by selling two-month 15% out-of-the money put options on a selection of 20 diversified stocks that have the highest implied volatility.”
Rich also said that HVPW can help reduce portfolio volatility “despite the fact that HVPW sells put options on some of the highest volatility stocks, because it sells options on a diversified selection of 20 large-capitalization stocks with strike prices that are 15% out of the money, HVPW experiences lower volatility than the broad market.” [Income ETF Turns High Volatility Into Low Volatility]
Through the end of the third quarter, HVPW sported a year-to-date gain of almost 8.2%. The ETF has a 1.5% yield target for every two months, with a 12-month dividend target of 9%. Rich said, “HVPW should perform well in upward-trending and sideways-trading markets, and may perform better than the broad market equity funds in downward-trending markets because of the downside protection it provides.”
Another one of the ETFs we highlighted was the Horizons S&P 500 Covered Call ETF (NYSEArca: HSPX), which Cunningham said “gives investors the best of both worlds, meaningful market exposure to the S&P 500 and increased income from a covered call strategy.”
“HSPX is the first ETF in the United States that writes out-of-the-money calls on all of the underlying stocks of an index – which in this case is the S&P 500, the most widely followed large-cap stock index in the world,” added Cunningham.
HSPX, which launched in late June, charges 0.65% per year. The fund usually sells one-month calls with a strike price generally 0.75 standard deviations above the underlying stock’s price on roll day. As Horizon’s notes, an ETF like HSPX is designed to outperform in bear and range-bound markets.
“Thus far the performance of HSPX has been great. The last few months have been a terrible time to be writing covered calls, with month after month of higher market returns. These are the worst-case market conditions for a buy-write strategy, and even still HSPX has delivered nearly 80% of the return of the S&P 500. (It has generated a 7.77% return since inception). When the market goes south or flat, we’ll likely be outperforming the market and generating an attractive income for investors,” said Cunningham.
We also discussed the PowerShares S&P 500 Downside Hedged Portfolio (NYSEArca: PHDG), which is not yet a year old and already has almost $90 million in assets. [A Look at New Volatility Hedged ETFs]
PHDG is an actively managed ETF “that seeks to achieve positive total returns in rising or falling markets that are not directly correlated to broad equity or fixed-income market returns,” according to PowerShares.
“Today, investors are just as interested in protecting their assets as they are in generating positive returns,” said Lipton. “The challenge, however, is to both generate positive returns and reduce downside risk. The PowerShares S&P 500 Downside Hedged Portfolio seeks to be a solution to this challenge.”
Top-10 holdings in the ETF include volatility index futures as well mega-cap names such as Apple (NasdaqGM: AAPL) and Exxon Mobil (NYSE: XOM).
“Forecasting future market turbulence is not easy. At the same time, investing a significant portion of one’s portfolio in VIX futures as a downside hedge can be a costly endeavor. The idea behind PowerShares S&P 500 Downside Hedged Portfolio is simple – dynamically allocate to VIX futures depending on historical and forward-looking market volatility trends via a quantitative rules-based index,” said Lipton.
PHDG’s underlying index, the S&P 500 Dynamic VEQTOR Index, has sharply outperformed the HFRX Global Hedge Fund Index this year and over the past 12 and 36 months, according to issuer data. The ETF charges just 0.39% per year, a small expense ratio by the standards of actively managed funds.