Exchange traded fund (ETF) provider PowerShares Capital Management is launching three new buy-write portfolio ETFs. The ETFs offer exposure to covered call strategies based on three indexes: The S&P 500, The Dow Jones Industrial Average (DJIA), and the Nasdaq 100. The new ETFs, which the company says, in its December 3 announcement, are the “first ETF portfolios covering major U.S. market indexes,” are slated to begin trading on Nasdaq and NYSE Arca on December 20.
“The portfolios are based on Chicago Board of Options Exchange (CBOE) BuyWrite indexes which, over the past decade, have had at least 25 percent less volatility than related stock indexes,” according to the Chicago-based company’s announcement. “This strategy is popular with asset managers, as it can provide additional income to a portfolio through call option premiums. These are the first ETFs that allow investors to capture the moving parts of a buy-write strategy, and they do it in one simple transaction,” Bruce Bond, PowerShares’ president and CEO, explains in the announcement.
Two of the new ETFs will trade on NYSE Arca: PowerShares DJIA BuyWrite Portfolio; and PowerShares S&P 500 BuyWrite Portfolio . The third new ETF will trade on Nasdaq: PowerShares NASDAQ-100 BuyWrite Portfolio.
Buy-write portfolios own “baskets” of stocks based on an index and sell a series of call options (at the money in this case) with a specified time to expiration, in this case one month. Premium income goes into the portfolio. When the value of that index goes up in the market, the portion of the portfolio that the covered calls are sold on does not realize the market upside, but keeps the call premiums and dividends, if any. On the other hand, when the value of that index falls in the markets, the covered call premiums and dividends, if any, work to cushion the portfolio. Volatility is reduced, in theory, so there’s both less upside and less downside.