A Possible Game Over Strategy?

Corey Hoffstein Tweeted out the following snippet, presumably from WisdomTree about its PutWrite Strategy Fund (PUTW).

There were a ton of replies jumping on WisdomTree, rightfully so, for the strangely worded commentary. Maybe they mean they've benefited from higher premiums when they sell puts? That seems reasonable if that was they mean but the actual wording could be confusing for anyone not confident in their understanding of options. 

We've looked at PUTW quite a few times in various places over the years. The idea is intellectually appealing but selling puts that are close to the money can be disastrous when markets crash. PUTW tracks an index that sells puts that are 2.5% out of the money. The general idea is that selling puts can lower portfolio volatility (I use a different fund, with a much different put strategy that does this) and help manage the downside but not during crashes. 

PUTW got pasted in the 2020 Pandemic Crash.

Ditto the Christmas Crash in 2018.

After these crashes it is slower to come back than a broad market index.

In yesterday's post we looked at the Cambria Value & Momentum ETF (VAMO) noting that it is up YTD but over several years has had a much lower CAGR than the typical broad based equity index fund. A lower CAGR isn't necessarily bad, lower volatility in both directions can be appropriate for various situations including someone in game over mode. 

So I was curious what a heavy allocation to PUTW might look like in the context of a below market return for some sort of game over situation. LOTIX is a managed futures fund with a comparison to the standard 60/40 portfolio as proxied with VBAIX.

 

And the results;

 

 

The results with PUTW are better than what we isolated with 100% VAMO yesterday. Clearly the PUTW-heavy portfolio does not keep up with the S&P 500 but a mix with a 6-ish CAGR, little to no interest rate risk will resonate with some. Portfolio 2 is positive this year thanks to the managed futures exposure. Keep in mind the period studied includes to crashes for PUTW and three, maybe four years where LOTIX muddled along without doing much that was good. 

For an apples to apples for 70% VAMO/30% LOTIX, that mix has a CAGR of 5.28% and a standard deviation of 10.28%.

I have no interest or intention of using any of the funds mentioned in this blog post for clients, or personally but there is value in exploring cross strategy dynamics. Corey's Tweet is correct but when I see something negative about a fund, I'm usually curious to turn it around and see what, if any, positive attributes there might be.