There's a new putwrite fund out. It's the CBOE Validus S&P 500 Dynamic Putwrite Index ETF (PUTD). There are other putwrite funds out there, this is the third one that I know of.
Selling puts benefits from a rising market and a neutral market. In a falling market, if the market you're selling falls below the strike price of the puts you sold, you'll get assigned which means you have to buy the asset at the strike price of the put. Back when the internet bubble was popping, in the context of doing my job at Schwab, I saw puts sold on names like Ariba and Akamai with $300 strike prices, getting assigned when the stock had dropped to $60. Put sellers were paying $300 for a $60 stock. That should frame the worst case type of risk.
Selling puts on the S&P 500 could have a similar outcome albeit with less magnitude the next time the index cuts in half. Less dramatically, with the S&P 500 at 4400, someone sells a put struck at 4200, there's a crash down to 3800 and the put seller is looking at big loss on the trade.
Selling puts is typically viewed as a conservative strategy. If you look, you'll find research that says it can offer close to equity like returns with less volatility. From the PUTD prospectus;
...will collectively provide over the long term a total return that will exceed that of the S&P 500 Index with lower volatility and drawdown.
That hasn't quite been the case for as far back as we can go with the two existing put selling funds I know about but the last six and a half years have been especially good for stocks and VIX has been compressed a good deal of the time in that run. Princeton Premium is a client holding.
The portfolio stats for PUTW and PPFIX are much different. There's a much lower standard deviation for PPFIX while only giving up 54 basis points of CAGR. The strategies are very different. PUTW sells close to the money puts so the fund is more volatile. Selling volatility (that's what these funds do) has been described as picking up nickels in front of a steamroller. PPFIX could be described as picking up pennies a few hundred yards ahead of the steamroller while PUTW is much closer to the steamroller.
PUTD will rebalance up to 5 times a month (ETF.com's description, the prospectus doesn't contain the word rebalance). Strike prices will be determined based on some process involving implied volatility. I imagine that PUTD managers expect this process will help mitigate the risks that go with selling puts. The fund I use in this space is one that I have described as looking like a horizontal line that tilts upward. In that light I certainly do not expect equity like returns. When it is doing what I think it should do, then my objective is to use it as a tool to manage portfolio volatility.
Let's revisit another idea we've looked at before. The prompt was a reader comment citing Bill Bernstein who is a fan of heavy weighting to TIPS. Zvi Bodie might be an even bigger fan of TIPS. The big idea is you buy TIPS, maybe a ladder, maybe not, and use the inflation protection to keep up with prices in retirement. There's an intellectual appeal to this. It is simple and it should protect against inflation.
If it could work though, I don't think it could work with TIPS funds. I don't have a great way to chart individual issues for TIPS so I can't stay. I am a believer in the exposure just not anywhere near what Bernstein appears to be talking about (I am relaying this second hand) and what I know Bodie as talked about.
STPZ is a client and personal holding. Vanguard Balanced Index (VBAIX) is a proxy for plain vanilla 60/40 and while that has never been my thing, it is certainly useful in these exercises. Obviously VBAIX has a much higher standard deviation but in terms of keeping up with or ahead of inflation, a CAGR of 8.81 doesn't seem so bad. We've spent a ton of time over the last year-plus looking at ways to structure portfolio that get closer to 60/40's CAGR while having less volatility. I think I'd rather continue on that path than tell someone to go all in on TIPS.
Can selling puts be some sort of proxy for inflation protection? I don't really frame it that way and I'm not sure what the answer would be but because of the lousy year for TIP in 2022, Princeton Premier shows a much greater CAGR, slightly higher standard deviation than TIP, better than half the CAGR of VBAIX with much less volatility.
If I'm not willing to go all in on TIPS, I'm certainly not going to go all in on selling puts. Client accounts have much more allocated to short term TIPS than the put selling fund.
The takeaway for me is heavy heavy TIPS exposure gives away a lot. And as I replied to the commenter, it would be easy to envision a retiree who is merely in good shape chugging along just fine with a 2-3% CAGR with TIPS and then they have some sort of large, unexpected expense requiring a large withdrawal which is when the consequence for such a lower CAGR would hit.
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