S&P Buy Write Shows Its Worth

Last December I wrote about the then new PowerShares S&P 500 Buy Write Portfolio (PBP). Over the last few years there have been countless closed-end funds and one ETN in this space, but PBP has been the lone ETF and most recent addition.

The idea behind call writing funds, which include actively managed CEFs like S&P 500 Covered Call Fund ( BEP) and NFJ Dividend, Interest & Premium Strategy ( NFJ), the iPath CBOE S&P 500 BuyWrite Index ETN ( BWV) and the indexed PBP, is smoother returns with more yield. In that December article I was generally positive, due primarily to the track record of the index, but suggested giving the fund the chance to prove it can track the index.

PBP has been tested right out of the gate. The S&P 500 has traveled a violent path toward a 7.3% decline as of Friday, and in that same time PBP has dropped 1.7%. Plus, as the chart shows, the ride for PBP has been smoother.

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Some might say that little more than five months is not enough time to know that a concept fund can deliver what it has promised, but given the way 2008 has played out so far I would say that the fund has proved itself and that 2008 has simply been another example in the longer term record of the index where the strategy has put in a compelling result.

If you buy into the track record so far then you must also expect that PBP will lag the S&P 500 the next time it is up a lot but that is by definition a smoother ride, up less on the way up and down less on the way down.

One of the objectives of this smoother course, as mentioned above, is adding some yield. So far PBP has paid one dividend, in March, with another one coming at the end of the month, and it was quite small at 5.25 cents. As I mentioned initially, the dividend payout is going to be a moving target. PBP sells at the money options every month. When the month ends those options either expire worthless or need to be bought back. So the dividend will be dependent on how that process of closing out the expiring month and moving out to the next month goes. While I would hope for and expect most of the payouts to be better than March's, there can be no certainty about the size of future dividends.

Regardless of that first dividend the relative price performance, which is the important thing, has been outstanding. Although it bears noting PBP has a not-so-cheap 0.75% expense ratio.

In addition to PBP having several months under its belt, another reason to follow up is that on June 12 PowerShares is expected launch the Nasdaq-100 Buy Write Portfolio expected to trade under ticker PQBW.

PQBW will benchmark to the CBOE Nasdaq 100 Index (BXN) and as you can see the general effect of less volatility than the regular Nasdaq 100 exists but the price performance has been less compelling than with the S&P 500. PowerShares has been able to capture the effect with the S&P 500 so it is reasonable to think the same will be true with the Nasdaq 100 as well.

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Despite the good showing thus far, PBP has not attracted much in the way of assets -- only about $5 million so far. This is surprising. If ever there was a time for investors to seek out lower volatility access to the market, 2008 would seem like the time.

PBP has a couple of different uses in a portfolio. One would be for investors not looking to hit it out of the park with their picks preferring not to take on the volatility that goes with that kind of stock picking. Taking a smoother ride to roughly the same result over the long term is appealing to many people.

The other use is in conjunction with aggressive stock picking. Anyone inclined to build a core and explore portfolio could use PBP as part of the core portion. Reducing the volatility in the core could offset some of the consequence for any mistakes made in the explore part of the portfolio.