Options-Based Funds Multiply

Terry Flanagan

The number of mutual funds, exchange-traded funds (ETFs) and closed-end funds (CEFs)) that focus on use of exchange-listed options for portfolio management (options-based funds) has multiplied from 10 in 2000 to 119 in 2014, according to a study sponsored by Chicago Board Options Exchange.

The study analyzed the performance from mid-1988 through the end of 2014 for some so-called traditional benchmark indexes, as well as for options-based benchmark indexes, such as the CBOE S&P 500 PutWrite Index and the CBOE S&P 500 2% OTM BuyWrite Index, that use S&P 500 Index (SPX) options. During that time period, both the PUT and BXY Indexes produced higher returns and lower volatility than the S&P 500 and S&P GSCI Indexes.

A buy-write strategy, also known as a covered call, involves buying a stock or a basket of stocks and writing call options that cover the stock position. The option premium received cushions downside moves in an equity portfolio. Therefore, the buy- write strategy may be expected to outperform stocks in bear markets and underperform stocks in bull markets.

SPX options, which usually have been richly priced, were a key component in the higher risk-adjusted returns generated by PUT and BXY. The study also found that the notional value of average daily volume in S&P 500 Index options rose to more than $170 billion in 2014.

“The study validates a lot of the hard work that our institutional marketing area has done over the last couple of year,” David Gray, vice president and head of the New York business development office for the Chicago Board Options Exchange, said at a press briefing this week. “This white paper emphasizes the use of options in funds. Not just options that are traded casually by a fund to offset the risk, but funds that actually use options as part of their portfolio management on a daily basis.”

The study was based on an analysis of 80 options-based funds with a total of $27.6 billion under management, including 51 mutual funds, 22 closed-end funds, and 7 ETFs, with a tithe largest being Gatex (mutual fund, $8.2 billion), Eaton Vance Tax-Managed Dividend Equity Income (closed-end fund, $1.8 billion), and BlackRock Enhanced Equity Dividend (closed-end fund, $1.7 billion).

An additional 39 options-based finds with objectives other than diversified U.S. equity were identified, pushing AUM to more than $46 billion. Funds benchmarked to indexes other than U.S. equities were beyond the scope of the study.

The study includes names and ticker symbols for these options-based funds.

“There’s now a list of 119 different funds, whether they’re, ETFs, mutual funds, or closed-end funds that use options,” said Gray. “Back when I was in institutional marketing, we never had any lists. We had to get on the phone or fly around the world. But now there’s an actual list, so there’s a lot of good data in there.”

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