by billb
20. May 2009 10:56
Covered call ETFs are a relatively new product. I've disclosed that I'm heavily in PBP. In fact, most of my broad based U.S. holdings are divided between PBP and BEP (which is a CEF). I find that historically they seem to offer the same returns with less drawdown (i.e. risk). I've demonstrated in previous posts that these covered call funds are acting like they're "supposed to". They were down less during the crash and are currently outpacing their tracking indexes year to date.
Sounds perfect, don't it? It's nearly perfect except for one thing. CC ETFs are long stock and short out of the money calls. At least they're out of the money whenever the ETF establishes a position. What happens in a 'crash up' when the market socks away solid gains? Now is a great time to cherry pick a timeframe. The last two months have been up 20%+ on the S&P 500. How did PBP do?
(click to enlarge)
The blue line is the SPY. The unleveraged, no frills S&P 500 ETF. The PBP is plotted beneath and is lagging by almost 10%. Ouch. But this shouldn't be a surprise. This is how the PBP is 'supposed' to behave. What's more, compare the two lines and you'll see the SPY is much more jagged than the PBP. This is very good. This behavior seemed to hold up on the downswing as well.
It's great to see some of these products behave as they're designed to.
On the other hand, leveraged ETFs are largely unpredictable. This is why I've stayed away from these products and recommend the same to my friends.
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ETFs
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