managing my money...

PBP – S&P 500 ETF with a hedging scheme

Tue, 03 Nov 2009 04:05:43 +0000

With all the uncertainty and volatility of the stock market, I want to try my best to minimize the risk in my investment portfolio if I were to keep my money in the market. As I have mentioned in the previous post, I have decided to give up on cherry-picking (or rather, crap-shooting) individual stocks for now, and I am learning about index ETFs (exchange traded funds) to see if they are more suitable option for me. When I was searching around the internet for right ETFs for me, I came across an interesting fund that may fit the profile of a security that I was looking for: PowerShares S&P 500 BuyWrite Portfolio (ticker: PBP).

As the name suggests, this is an ETF that tracks S&P 500 index. Of course, there are other S&P 500 ETFs that are more popular, and hence more liquid, such as SPDR S&P 500 (ticker: SPY) and iShares S&P 500 (ticker: IVV). What makes this fund from PowerShares very attractive to me is that it hedges against market volatility and risks by selling call options on its holdings. Indeed, in my opinion, this feature places the fund in the category of strategic ETFs rather than that of an index ETFs.

Years ago, many of us heard about horrific stories about investors whose assets were wiped out because of their investment in options. So, options still sound vaguely scary to me, and certainly it’s not going to be something I will play around with. However, the truth is that the options themselves are legitimate investment vehicles that can be used strategically to provide advantages to investors. Whether fund companies advertise it or not, many index ETFs uses options in their attempts to achieve their goals. Leveraged ETFs uses options to multiply the exposure, and standard index ETFs uses options to adjust the behavior of the price to match the underlying indices. PowerShares S&P 500 BuyWrite Portfolio uses the options to reduce the volatility and risks… and reward potential as well to some extent.

The fund normally invests 80% of its total assets in common stocks of S&P 500 companies, and sells call options on them with an exercise price at or above the prevailing price level of S&P. Basically, one way to think of its strategy is that it is paying for some sort of insurance. The call options acts as an insurance that helps the fund reduce the damage in the down market. The options becomes useless in the up market, and hence its cost would eat up some of your profit, but that’s how insurances are.

This is a relatively new fund, so there is only limited amount of track record to review. However, looking at the price chart for the past year, which consists of a devastating market in the first half and a soaring market in the second half, the fund seems to be doing what it’s designed to be doing: its damage in March this year was significantly less than that of the underlying index, but its growth during prolonged upward trend in the past six month lagged a little. The price curves of this fund seems to be much smoother than that of the underlying index.

Overall, I really like the strategy of this fund and its track record in the past year. However, there are a few caveats: the liquidity and the expense ratio. The PowerShares’ PBP actually has a respectable market capital around $123.50M, but its average trading volume at 46.00K is quite small even if we respect the fact that this fund is designed to be held on rather than to be traded frequently. As for the expense ratio, PBP charges 0.75%, and it is indeed one of the more expensive ETFs out there. For the sake of comparison, I should note that SPDR’s SPY and iShares’ IVV are very liquid (with the average trading volume at 198.07M and 3.24M respectively) and also very inexpensive (with the expense ratio at 0.10% and 0.09% respectively). So, basically, person who invests in PBP should be planning to hold on to it and willing to pay for the risk management.

Despite these drawbacks, I am seriously considering this fund as one of core holdings in my portfolio. I personally find this fund particularly appealing in the current market climate with increasing level of uncertainty and anxiety. After all, the fund may provide not only the strategic advantage but also peace of mind that’s hard to maintain in the market these days.

Retirement Account

Mon, 21 Sep 2009 06:29:07 +0000

First of all, retirement accounts can be divided into two categories: employer sponsored accounts and individual accounts. Bluh bluh bluh.

Tax Returns from Past Years

Sun, 20 Sep 2009 22:55:20 +0000

You can correct your tax return for 3 years from the day you filed the original tax return in question. This means, if you filed a tax return for the fiscal year 2006 on 15 April 2007, you can correct it until 15 April 2010. So, if you failed to claim your deductible expense, you can still get the money back!

2009 Max Contribution to Retirement Plans

Wed, 02 Sep 2009 05:08:34 +0000

For the fiscal year 2009, the maximum tax-deductible contribution to your retirement plan is $15,500 for people under the age 50, and $16,500 for people over the age 50. Of course, many of you knew that already, and hopefully started contributing into your account.

Resident vs. Non-Resident

Wed, 02 Sep 2009 05:06:59 +0000

The main difference between filing your tax as a resident and a non-resident is that a resident can claim the standard deduction while a non-resident is not allowed to do so.

Testing Anchor

Tue, 10 Feb 2009 21:49:23 +0000

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