Cushioning Losses With ETFs

As the markets continue to witness enhanced volatility and uncertainty, exchange traded funds (ETFs) which employ options as a way to hedge bets can provide insurance and additional income.   

These ETFs generally hold stocks while writing call options against their respective index, which enables one to have somewhat of an insurance policy against a downward spiraling market.  Additionally, these ETFs generate income when they sell their calls, which could dwindle away losses generated from a falling market.

Although these ETFs offer hedges against a falling market, a way to reduce risk and a means of additional income, they have their drawbacks as well.  In a stable and fast growing market, these option employed ETFs generally do not fare well.  In fact, these ETFs work the best in choppy markets and are likely to underperform when volatility is low and investor confidence is high.  

Some of these ETFs include:

  • PowerShares S&P 500 BuyWrite Portfolio (PBP), which holds companies like Exxon Mobil (XOM), Microsoft (MSFT) and Proctor & Gamble (PG) while writing call options against the S&P 500.
  • PowerShares NASDAQ-100 Buy-Write (PQBW), which provides exposure to the tech-heavy Nasdaq 100, including holdings and call options in Apple Inc (AAPL) and Google (GOOG).
  • iPath CBOE S&P 500 Buy-Write Index ETN (BWV), which is a senior unsecured debt security that gives exposure to the CBOE S&P 500 Buy-Write Index.

In a nutshell, given the current market environment, any form of insurance is a good idea. Options, specifically covered calls, can offer a downside or sideways cushion against losses and volatility and the aforementioned funds offer an easy way to add buy-write insurance to your portfolio.

Disclsoure: Long PBP

Advertisements

About etftutor
Kevin Grewal is the founder, editor and publisher of ETF Tutor and serves as the editor at www.SmartStops.net, where he focuses on mitigating risk and implementing exit strategies to preserve equity. Additionally, he is the editor at The ETF Institute, which is the only independent organization providing financial professionals with certification, education, and training pertaining to exchange-traded funds (ETFs). Prior to this, Grewal was a quantitative analyst at a small hedge fund where he constructed portfolios dealing with stock lending, exchange-traded funds, arbitrage mechanisms and alternative investments. He is an expert at dealing with ETFs and holds a bachelor's degree from the University of California along with a MBA from the California State University, Fullerton. He is contributing author on The Street - his articles can also be found published on various sites including Yahoo! Finance, The Globe and Mail , Daily Markets, MSN Money, Seeking Alpha, Fidelity Investments, Traders Library, and Minyanville. Prior to this, Mr. Grewal was an analyst at a small hedge fund where he constructed portfolios dealing with stock lending, exchange-traded funds, arbitrage mechanisms and alternative investments. He is an expert at dealing with ETFs and holds

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: