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As of Sept. 6, the S&P 500 is higher by 14.4% year-to-date with annualized volatility of 12.8%. The former is impressive and the latter figure is by no means cause for alarm. Looking at shorter timeframes, things are different on the volatility front.
Over the past 90 days, annualized volatility on the S&P 500 is 15.2%. With Election Day less than two months away, it’s certainly possible that percentage will increase. Clients that know as much could be rightfully skittish, but there are some strategies designed for lethargic and turbulent market settings. Those include options-selling funds, which often focus on covered calls.
Covered calls, including in fund form, are solid avenues for generating income outside the realms of stocks and bonds. This strategy is increasingly accessible via exchange traded funds, many of which sport big yields and tolerable expense ratios. Plus, the asset class is pertinent in the current environment.
As advisors know, options selling also includes put writing – itself an income strategy that can work well during sluggish or volatile market climates. There are exchange traded funds for that, including the WisdomTree PutWrite Strategy Fund (PUTW).
PUTW Pertinent Today
In terms of income, PUTW could be appealing to a broad swath of clients because it generates 2.5% monthly premiums by selling put options on the S&P 500. Yes, that works out to 30% annually assuming markets are flat.
All that sounds good and it is, but ETFs such as PUTW are also reminders that there are no free lunches in financial markets. There’s a tradeoff because by selling puts, a trader leaves some upside on the table when stocks rebound. Still, PUTW is doing its job in the recently tepid-to-turbulent setting for risk assets.
“Since July 16 of this year, markets have generally trended lower, with the sell-off accelerating in early August when U.S. labor markets started to show signs of cooling. While markets have rebounded from the lows, PUTW has maintained the return advantage it experienced during the sell-off,” according to WisdomTree research.
As noted above, options writing strategies usually subject investors to missed upside, but to its credit, PUTW has been competitive with the S&P 500 even as the index rebounded from the late July/early August artificial intelligence (AI)-induced sell off.
“While we know that markets ultimately recovered, PUTW outperformed by nearly 300 basis points to the lows, helping investors remain invested,” adds WisdomTree. “After touching the lows at the end of October, the AI trade appeared to be back on as markets quickly rallied to all-time highs. While performance eventually eclipsed the returns of PUTW for this period, there was no guarantee that markets would not continue to be volatile.”
PUTW Offers Two-Pronged Returns
One of the advantages of an options-selling strategy such as PUTW is that investors have exposure to sources of returns: interest income and the income earned from selling options, the latter of which can increase as market volatility does the same.
“While equities have delivered strong returns recently, there is no guarantee that the Goldilocks period of high returns and historically low volatility will continue. In our view, a strategy like PUTW could add significant value to investor portfolios should markets remain volatile and/or rangebound,” concludes WisdomTree.
Bottom line: Allocations to options-based strategies don’t need to be excessive, but ETFs such as PUTW have a place in client portfolios and that’s particularly true for risk-averse, income-hungry clients.