Real-World ETF Questions

May 17, 2017

What About Covered Calls?

A consistent theme here has been concern that we’re in for a bit of a correction, but a real reluctance to just sell everything. Capping upside with options, to generate more income, was a common theme. I was asked multiple times if there was a buy-write ETF. There are several I’d point out: the PowerShares S&P 500 Buy Write ETF (PBP) and the Horizons Nasdaq-100 Covered Call ETF (QYLD), in particular.

The questions continued to get smarter. Most of these folks already know how to trade options, so they wanted to talk about the pros and cons of doing the covered call writing themselves versus paying a fee to an ETF to do the same trade for them.

They asked about economies of scale, and maintaining exposures. Again, these are the right questions to ask.

How Illiquid Can I Go?

In multiple contexts, investors here wanted to understand how to evaluate the real liquidity of an ETF. More than asking about specific niche-ETF tickers, they wanted a process to use to help evaluate whether an ETF was “too illiquid” to consider. We talked rules-of-thumb, and how to look at spreads and volumes with a weather eye.

And then, more smart questions. What about junk bonds in a market crisis? What about MLPs? Should I be worried about ETFs that track closed-end funds? How can I monitor spreads on a long-term basis to know when something changes? I wish every investor were smart enough to know these were the right places to be looking.

Lessons Learned

There’s a tendency in the investment management industry to be a bit dismissive of the retail investor. People put them, by default, into the “under-informed” category, or “less-sophisticated.”

I know I’ve been guilty of that myself. But I think that’s changing. The education playing field seems to be leveling these days. I am used to getting asked rudimentary questions by folks running hedge funds, or advisors running billion-dollar books of business. Nobody comes out of the womb understanding all the nuances of ETFs. That’s what we’re here for.

But now I’m getting asked the interesting, hard questions by dentists and retirees. The industry would do well to take them just as seriously as they take an institution.

At the time of writing, the author owned none of the securities mentioned. You can reach Dave Nadig at [email protected].

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