All investors seek to make money on their investments. Seasoned investors have learned that it is not just about seeking gains but also managing risk that counts. There are numerous metrics that have been developed to gauge whether the rewards earned are greater or less than the risk exposure Alpha, Beta, Sharpe Ratios, etc.
However, if the market went down, they would have lost proportionately more. So, their gains do not represent anything more than a reflection of their risk. After factoring in the inherent inefficiencies, we deduce that the risk actually exceeds the reward. What if such an investment also produced outsized returns when the market was flat or range bound?
Would we have the Holy Grail of investing? Now, if someone could make it really easy and create a low-cost ETF that promises to do this Every serious investor should take notice. PUTW , which promises all this. But before we place a crown on its head, we need to do a little explaining. First, the ETF really isn't an "investment" in the classic sense. It is really an implementation of a heretofore theoretical "investment strategy.
Each successive month, at expiry, it rolls the puts ATM. There are some operational issues that I won't go into here, other than to say they should have a relatively minor effect on performance. Now, since the ETF is brand new, one might ask how can it have a year history?
Until now, however, it remained just an academic exercise. Skilled option investors could try to replicate the PUT Index, but it presented some difficulties of scale. Before we say "well 30 years of history, reduced risk, outperformance in range bound markets, let's go," we need to understand how this is accomplished and the potential downside.
Since the ETF doesn't drop as much in a down market or rise as much in a rapidly up market, it is simply Were it just that simple, I wouldn't have written this article Markets don't go up or down So let's look at a more "working" example:. On a drop, volatility usually goes up, and premiums increase. The market, though it went up and down, remains flat. Let's put a little more volatility into the mix. Now, let me shake it up a bit and add more volatility:. This is what we call "whipsawed.
So, when there are big swings, even if the underlying remains flat, the ETF will lose ground. Of course, over time and with milder markets, this ground can be made up, provided that the market starts to behave and avoids more wide swings. But that takes time and is a slow process. Now, before you conclude that such an event is unlikely, I would remind you that it happened twice in the last six months.
I could add numerous more examples but let me try to explain:. I'm going to leave it to each reader to do the math, but let me give some more hypothetical situations:. Furthermore, it can substantially outperform during range bound and flat markets.
However, there is no guarantee that it will achieve this result. There will always be flat markets and volatile markets and the cumulative results can vary. PUTW, to be successful, requires that "flattish" markets occur often enough to offset losses during volatile markets.
It is my sense that this can be reasonably achieved if one takes a long-term view. Any losses in volatile times should, eventually, be overcome by gains occurring when markets level. It is not for short-term investors. On the other hand, it can serve as a complete long-term portfolio replacement vehicle. I'm usually reluctant to offer recommendations because no investment can be properly evaluated in a vacuum So, rather than a "recommendation" as such PUTW works best in slow growth and flat markets.
It can also work in volatile markets, but it does require some patience and willingness to stay the course. The DIY option investor will probably have their own way of accomplishing this objective and most DIY'ers have "fun" doing so.
But, for all those investors that are less involved in options or want an easier path, it's a perfect choice.
Personally, I think we are in a slow growth economy right now and outsized gains seem, otherwise, elusive. So a long position in the market would benefit from this ETF. I think the basic concept is worthwhile but has a flaw. On market drops, the fund should write fewer ITM puts at the previous strike instead of going ATM at the current strike. This guards against the "whipsaw" and will show a significant increase in returns with even less historical risk. However, it does move the ETF more in the direction of a "managed" put-write and would require a "mind shift" by WisdomTree.
But, after all, it thinks of itself as "Wisdom" so I hope it takes the clue. Additionally, DIY investors could write monthly puts when volatility is high and weekly puts when volatility is low and will likely do even better. PUTW has a net expense ratio of.
Generally, selling options generates short-term gains and losses. This can be a significant benefit in taxable accounts. Frankly, I prefer it that way, but each to their own. Nevertheless, it makes sense to look at different approaches I wrote this article myself, and it expresses my own opinions.
I am not receiving compensation for it other than from Seeking Alpha. I have no business relationship with any company whose stock is mentioned in this article. Summary What is a Put-Write strategy? Want to share your opinion on this article? Disagree with this article? To report a factual error in this article, click here. The chat platform is currently undergoing maintenance. To see the chat, try to refresh in about minutes.
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