With global equity markets moving mostly sideways to down so far in 2015, buy-writes have delivered robust returns.
With one month left in calendar 2015, global equity markets are hanging on to the slimmest of gains, or are strongly negative.
The MSCI US Broad Market Index is ahead 2.65% while the S&P 500 is ahead 3.01% year-to-date. The MSCI Emerging Market Index is down 12.7% through November. Low single digit or negative equity returns are not going to help many clients meet their investment objectives.
Compare those returns to the CBOE Options-Based Benchmarks. The CBOE BXM—a buy-write on the S&P 500 index—is ahead 6.10% YTD, 309 basis points ahead of the long-only S&P 500. The CBOE BXR—a buy-write on the Russell 2000—is ahead 7.49% through November compared to 0.60% for the Russell 2000, a 689 basis point advantage. Our own structurALPHATM Global Hedged (Buy-Write) Strategy is 4.6% ahead of a global long-only benchmark. These are not insignificant advantages.
But most significant is the fact that all of this outperformance comes from a passive portfolio structure, not active management.
Structure IS the Strategy
There is great and growing interest in so-called “smart beta” strategies these days, and for all the right reasons. It makes sense that organizing an index around factors other than cap-weighting offer the potential for better returns, less risk or both. Yet smart beta is only about tilting towards factors (growth, value, yield, quality, momentum, equal weighting) that already exist in an index.
The power of the CBOE Options-Based benchmarks comes from the short, near-term option hedge. Selling a call option to hedge an underlying exposure (S&P 500, Russell 2000, etc.) delivers a positive cash flow to the portfolio. This is a NEW source of portfolio returns….emphasis on NEW.
We see countless product and strategy pitches. Virtually all of the pitches for smart beta are organized around tilting towards that elusive factor already embedded in a portfolio. Virtually all of the active management pitches—whether for stock picking or allocation driven strategies—are organized around the effort to out-maneuver, out-think, out-rotate or out-time, in the markets. From where we sit, most or all of that is wasted, even counter productive motion. It reminds us of our days on the floor of the options markets when one wag called option trading “picking up dimes in front of the bulldozer.” Well ,the dimes turned into pennies and the bulldozer got an extra gear, and the floor trading business largely went away.
To us, tilting towards existing factors may be entirely worthwhile, but is nibbling around the edges. The ETF industry has matured to the point where the differentiation of smart beta makes sense in an effort to compete and gather assets. Those that are successful—whether pursuing traditional or smart beta constructs—are building mighty businesses. See the recent article in Bloomberg about ETF asset flows here. Vanguard’s Gain is Wall Street’s Pain as Billions Leave Financial Industry.
But for us, collecting a cash flow methodically each month by selling a call option hedge is picking up the $20 bill on the sidewalk that everyone else is walking right past. We are happy to do it….and so are our clients. So far, 2015 has been the perfect example of why these simple, hedged strategies belong in any investor's asset mix.
Click here for more information on the CBOE Options-Based benchmarks.