Yesterday I read a very interesting post on Vix and more that discussed the two main US covered call ETF’s, PBP and BWV. In particular, PBP has had a very solid year compared to the S&P500. To be fair the data points used by Vix and more were well selected as the Covered Call ETF outperformed by almost 8% over the past 6 months. If I take a longer term view, the difference is much smaller with PBP outperforming the S&P500 by 2.1% as of the time I wrote this.
If I look to Canada, where HEX is the Covered CALL that one would compare to the S&P TSX60, there has not been any outperformance over either 6 or 12 months. The lag is not significant (less than 1%) but I would still expect covered call strategies to have performed better in the volatile 2011.
The More Surprising Part
If US covered call ETF’s do seem to have had more success, why is it that Canada, a market several times smaller than the US has seen an explosion of covered call ETF’s that track specific sub-sectors or different strategies while the US has seen no new entries? It’s not as if the US did not have new ETF’s launching every week most of which track the same indexes as already existing ETF’s… Why more ETF issuers do not try to launch competing products to PBP and BWV is a bit of a mystery to me.
The one thing that I could see would be that the cost of managing covered call etf’s is certainly more than a more standard ETF that buys and holds (more or less). Certainly, it also involves having a very different staff, one that can manage a more complex buy and write strategy. That being said, I don’t think this would explain it as many US issuers have gotten involved in complex products such as 3x leveraged ETF’s that also require a very significant amount of complexity.
Could it be that some fear US regulators will get involved in Covered Call strategies? I doubt it. These are not new or very risky strategies. They can be a bit misunderstood by some investors but they are not more volatile than others and could actually be less volatile in many environments. Generally, there would be no derivatives required in such an ETF either.
Mystery To Me
I’m certainly hoping that over the next few months, a few other ETF issuers in the US launch new products that would offer more alternatives and different strategies. I’m not holding my breath since I’ve heard nothing about it, but I will keep looking out for them and keep you posted.