How To Differentiate Funds That Have The Same Strategy

On Sunday afternoon I dug into the recently listed Neuberger Berman Option Strategy ETF (NBOS). It is yet another derivative income fund, this one sells put options, it is a putwrite fund. It turns out it is actually a mutual fund conversion from the Neuberger Berman US Equity Index Putwrite Strategy Fund, it had symbol NUPIX before changing to NBOS. 

Like similar funds, it owns a lot of treasuries and mostly sells index put options. The S&P 500 closed Friday at 5464. The three largest short put positions in NBOS are struck at 5425, 5355 and 5455 so they are somewhat close to the money. The fund appears to be most similar to the WisdomTree Putwrite Strategy ETF (PUTW). As of Sunday night, there was no info on what puts the fund was short but the fact sheet dated 3/31 listed 5150 and 5240 and as of 3/31 the S&P 500 was at 5254, also close to the money. 

The risk with selling volatility in this manner is that the S&P 500 drops a lot, far below the strike price of the option resulting in the short position being closed out at a large loss. A win for the strategy is that the options sold, expire worthless, allowing the seller which is the fund in this case, to keep the premium and then go on to sell more puts. The strategy works more often than not, at the index level, because the broad market goes up more often than not. The faster the decline, the worse the fallout when the strategy goes bad. 

During the 2020 Pandemic Crash, NUPIX fell 23% and PUTW fell 27% versus 34% for the S&P 500. In 2022, so a different type of down market, NUPIX fell 5.8% and PUTW fell 10.1%. The fast crash was worse than the slower decline of 2022 which makes sense.

The chart is from Portfolio Labs and it shows the two funds looking similar. NBOS is the same strategy and managers so if you take anything from the chart as to how NUPIX did, then it might carry forward to NBOS in terms of volatility, the fact that it goes up more often than not and a lower standard deviation at 9.93 per Yahoo Finance than the S&P 500 which is a little over 16.

Comparing NUPIX to the Vanguard S&P 500 ETF (VOO).

Do you think it looks like a differentiated return stream. Putwrite is an alternative strategy but how alternative? Portfolio Labs says NUPIX has a .90 correlation to VOO, I'd say it is a tool for dampening portfolio volatility but I don't think it can be the type of alt that protects in a drawdown. It hasn't been able to do that which makes sense, it is a bullish strategy. 

I've mentioned client and personal holding Princeton Premier Income Fund (PPFIX). It sells index puts but does so much differently than NUPIX/NBOS and PUTW.

PPFIX is not trying to capture equity beta. I would say the other two are trying to capture some equity beta. PPFIX was not crash proof, but it fell much less than NUPIX and it was up slightly in 2022. Where NUPIX/NBOS and PUTW might be pretty close to picking up nickels in front of steamroller, PPFIX is picking up pennies a mile and half ahead of the steamroller. For the most part, PPFIX sets the expectation of being a horizontal line that tilts upward. 

You can see where using PPFIX instead of PUTW as a diversifier gives a much higher return than 60/40 with almost the same standard deviation. And the 2022 result.

Obviously, I'm not putting anywhere near 34% into PPFIX or any single alt. This is simply an example of how different variations of what might be the same strategy can have very different impacts on the portfolio. In an up market, I would not expect PPFIX to keep up with the other two but I would expect it to do better during bear markets like we had in 2022. 

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