A Substitute For Another Fund

With apologies to The Who.

I have been wondering whether this new BuyWrite ETN (BWV) could serve as substitute for a regular S&P 500 fund when combined with one or two other products.

The idea would be to capture most of the effect with less volatility. My first thought is some sort of combo of BWV and iShares DJ Dividend Select Fund (DVY), which a few clients own.

If SPY yields 1.5% a 50/50 mix of DVY, 3% yield, and BWV, no actual payout, obviously means no yield is given up.

The thing that is given up is growth. You may have a negative opinion about growth but no growth makes for an undiversified portfolio. If you want to add growth, how much should you add? It appears that growth accounts for 48% of the S&P 500. I get 48% by looking at the Total Market Cap numbers for the S&P 500 Growth and S&P 500 Value ETFs, IVW and IVE respectively.

Since this is just theoretical I could see where 25% to growth, 35% to DVY and 40% to BWV could create the effect but it would be very underweight growth. Because BWV is brand new there is no way (at least I’m not aware of away) to analyze this as portfolio. See the chart below though and you will see that during dips of varying magnitude in the last two and a half years the BXM index (the thing that BWV will try to mimic) has really held in very well which is why in other posts since this blog started I have wanted a product like BWV to come.

Lest anyone add one plus one and get eleven I still believe it makes sense to let BWV prove it can track the BXM index. While I don’t know exactly how long it will take to prove itself I would think it would take at least several months.

This post belies the fact that I am favorably disposed but I have no position and I can’t be certain at this point if I ever will have a position. Further, this post is simply an exploration, more specifically a fumbling around in attempt to learn more about this.

On an unrelated note, did anyone see the quick Ray Liotta interview during the second period of the Stanley Cup game last night? “Oh, snap” is all I can say.

7 Comments

  1. An alternate pairing might be – splitting the intended buy – one quarter to an “Ultra” i.e. ULPIX and three quarters to BWV.

    OG

    Reply
  2. or what about a smaller portion in ultra growth??

    Reply
  3. What about using simple market timing and momentum techniques to help you determing your growth tilt?

    http://tinyurl.com/36tzkm

    Reply
  4. tom k many people don’t think of themselves as market timers but a decision made based on the stock market or economic cycle is a timing decision.

    Reply
  5. In a rising market i would assume the return would be minamel or negative becuase of fees. Is this correct?

    Reply
  6. The chart included in the post says no. The index was up roughly 12% in 2006, a little behind the SPX.

    Now factor in that BWV has a 75 basis point fee and the fund would have been up about 11.25%. Clearly a lag but only a fraction of the volatility.

    We still do not know if BWV will track the BXM index or not.

    Reply
  7. I was born with a plastic spoon in
    my mouth….

    Reply

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A Substitute For Another Fund

With apologies to The Who.

I have been wondering whether this new BuyWrite ETN (BWV) could serve as substitute for a regular S&P 500 fund when combined with one or two other products.

The idea would be to capture most of the effect with less volatility. My first thought is some sort of combo of BWV and iShares DJ Dividend Select Fund (DVY), which a few clients own.

If SPY yields 1.5% a 50/50 mix of DVY, 3% yield, and BWV, no actual payout, obviously means no yield is given up.

The thing that is given up is growth. You may have a negative opinion about growth but no growth makes for an undiversified portfolio. If you want to add growth, how much should you add? It appears that growth accounts for 48% of the S&P 500. I get 48% by looking at the Total Market Cap numbers for the S&P 500 Growth and S&P 500 Value ETFs, IVW and IVE respectively.

Since this is just theoretical I could see where 25% to growth, 35% to DVY and 40% to BWV could create the effect but it would be very underweight growth. Because BWV is brand new there is no way (at least I’m not aware of away) to analyze this as portfolio. See the chart below though and you will see that during dips of varying magnitude in the last two and a half years the BXM index (the thing that BWV will try to mimic) has really held in very well which is why in other posts since this blog started I have wanted a product like BWV to come.

Lest anyone add one plus one and get eleven I still believe it makes sense to let BWV prove it can track the BXM index. While I don’t know exactly how long it will take to prove itself I would think it would take at least several months.

This post belies the fact that I am favorably disposed but I have no position and I can’t be certain at this point if I ever will have a position. Further, this post is simply an exploration, more specifically a fumbling around in attempt to learn more about this.

On an unrelated note, did anyone see the quick Ray Liotta interview during the second period of the Stanley Cup game last night? “Oh, snap” is all I can say.

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