Funds With Down-Market Protection

The PowerShares S&P 500 BuyWrite Portfolio(PBP Quote) and the PowerShares Nasdaq-100 BuyWrite Portfolio(PQBW Quote) are all-weather ETFs.

The funds provide investors with positive returns in up markets and outperform in down markets.

The concept behind these BuyWrite ETFs is that they invest in the stocks contained in the S&P 500 and the Nasdaq-100 indexes and then write covered calls against those shares every third Friday to generate additional income.

The calls that are written, which have about one month until expiration, are held until expiration and cash settled, at which time new one-month calls are written.

"You are selling the calls just out-of-the-money," says Matt Moran, vice president at the Chicago Board Options Exchange. "In doing so, you are taking in a tremendous amount of premium income."

For PBP, writing calls can cut short rallies in holdings on the upswing, such as Bank of America(BAC Quote), Citigroup(C Quote) and Wells Fargo(WFC Quote). The fund can compensate for that by limiting declines in plummeting shares, including American International Group(AIG Quote), Apple(AAPL Quote) or Intel(INTC Quote).

The CBOE S&P 500 BuyWrite Index(BXM Quote), which PBP tracks, was launched by the CBOE and Standard & Poor's in 2002. It resulted from a study by Duke University professor Robert Whaley that analyzed the results of a buy-write strategy from June 1998 through December 2001.

The CBOE has since updated data on BXM to demonstrate how it would have performed from July 1986 through August 2008. According to the CBOE and Bloomberg, $1 invested in BXM in July 1986 would now be worth $8.87. One dollar invested in the S&P 500 would have returned $8.55 over the same period. As for bonds, 30-year Treasury bonds would have yielded $4.61 and 3-month Treasury bills would have turned into $2.72.