Interesting New BuyWrite ETFs

Hat tip to Barron's for pointing out the following three new bond-ish ETFs; iShares 20+ Year Treasury Bond BuyWrite Strategy ETF (TLTW), iShares Investment Grade Corporate Bond BuyWrite Strategy ETF (LQDW) and iShares High Yield Corporate Bond BuyWrite Strategy ETF (HYGW). The first three letters in each symbol tell you the corresponding plain vanilla ETF (the name does too). 

The basic strategy is that the funds will sell monthly call options just a little bit out of the money. The fund, and then holders, will collect the option premium, still retain just a little bit of upside appreciation when there is any but will take all the downside price-wise. Yes the premium could buffer the downside a little but is more like basis points which would do very little in the face the big declines for funds exposed to interest rate risk. Here's TLT vs TLTW.

 

And here's HYG and HYGW.

 

If prices are falling in a meaningful way for funds like TLT or HYG, I don't see anything that would prevent the buywrite versions from going down almost in lockstep. At this point, I have no idea when the plain vanilla versions will will go back up in price (yields going back down) but if they do, the buywrite versions won't capture it. 

When I see something like this, maybe just about any sort of strategy fund, I am inclined to wonder whether it can be a proxy for something else. Personal holding (test driving it for possible use for clients) Madison Claymore Covered Call Fund (MENYX) is in the same neighborhood as the three new iShares funds, it is equities though and has latitude over how it sells calls and which securities it owns, has a long standing track record for being a low volatility equity proxy. The iShares funds having much narrower mandates are much more likely in the good times to look like Global X NASDAQ 100 Covered Call ETF (QYLD) versus its plain vanilla correspondent which is the Invesco NASDAQ 100 ETF (QQQ). And in their short time so far, bad times evidently, the new iShares funds look a lot like their plain vanilla cousins.

 

Over longer periods, QYLD looks nothing like QQQ. The chart is supposed to be total return so hopefully it captures the "yield" of QYLD which is very high from the option premiums.  

Here's total return YTD.

 

Is the outperformance in this year's bear market worth the underperformance in the other years? Of course some will say yes but the two charts do set expectations pretty well. 

I wouldn't rule out that these were created for a client (of iShares) request to be used as part of some multi-faceted strategy but for now the asset levels don't reflect that with TLTW being largest so far with $14 million in AUM. We'll see if that develops.

An important point of understanding that I've tried to be consistent about over the years is to be wrapper-agnostic. I've been saying that it is not logical than one wrapper (ETF, traditional mutual fund, closed end fund) can be the best for all exposures and strategies. 

The best indexed covered call product I've ever seen was the old iPath CBOE S&P 500 BuyWrite Index ETN which traded with symbol BWV before it closed in 2018. ETNs are their own headache which might be why BWV closed but it tracked a calculated index shown below as BXM, it did not actually sell covered calls. The index "worked" but it just doesn't seem like the indexed, covered call ETFs do what a holder would hope for which I think is capturing a good amount of the upside (can't do that by design), buffer the downside (a few basis points won't help against a 20% decline) and kick out some yield (some of them do kick out a lot of yield though).

If the fixed income, buywrite ETFs do better than I expect, I will write an update.