Buy-Write ETF Strategy for Better Risk-Adjusted Returns | ETF Trends

As the Federal Reserve is set to hike interest rates, exchange traded funds that track a buy-write strategy could outperform the broader equities market.

“The macro and market drivers that made Buy-Write an effective investment strategy are pushing their way back to center stage after half a decade in the wings,” according to Nicholas Colas is Chief Market Strategist for Convergex. “Nothing works across all investing environments, of course. But as the Federal Reserve normalizes interest rate policy and the options market prices risk more in line with historical averages, this is one approach that should begin to show its relevance again.”

There are a few covered call, or “buywrite,” ETF options available. For instance, the Powershares S&P 500 BuyWrite Portfolio (NYSEArca: PBP), the largest buywrite ETF based off the S&P 500, and the Horizons S&P 500 Covered Call ETF (NYSEArca: HSPX), which also employs a covered call strategy on the S&P 500. [Covered Call ETF Generates Income, New Highs]

The Recon Capital NASDAQ-100 Covered Call ETF (NasdaqGM: QYLD) provides a covered-call strategy that targets Nasdaq-100 securities.

Additionally, the AdvisorShares STAR Global Buy-Write ETF (NYSEArca: VEGA) employs a covered call strategy through global stocks ETFs, including about 4.5% in emerging markets and 6.3% in developed EAFE countries, along with some international bond exposure.

With yields on benchmark Treasury bonds ticking higher on higher interest rate speculation, buy-write ETFs have been outpacing the broader market. For instance, PBP rose 5.8% and the BMX, an index of the S&P 500 and covered call position, increased 4.3% year-to-date while the S&P 500 gained 3.6%.

The covered-call options strategy allows an investor to hold a long position in an asset while simultaneously writing, or selling, call options on the same asset. Traders would typically employ a covered-call strategy when they have a neutral view of the markets over the short-term and just bank on income generation from the option premium.