How to Buy a Less Volatile Stock Market

I’m a big-fan of exchange-traded funds in general: I think that for most investors

they make more sense than mutual funds. Today, Barclays announced a new one

(technically, it’s an exchange-traded note, not an exchange-traded fund) which

I think is very attractive to investors who have some risk aversion.

Your first basic ETF is always likely to be a fund linked to the S&P 500;

if you want to offset that equity risk (the S&P is trading at all-time highs,

after all), then you can buy some bond funds as well. But the problem, of course,

is that the bond market is even frothier than the stock market.

Enter Barclays, with a new

product, which helps to mitigate some of the downside to stocks. It trades

under the ticker symbol BWV, and it’s an exchange-traded fund which tracks the

CBOE S&P 500 BuyWrite index.

The what? Really, it’s not important. The thing to understand is that

when the S&P goes up ridiculously fast, you lose some of that excess upside

— you underperform the market. And when the S&P goes down, you outperform

the market. If you look at aggregate performance since 1988, the total return

is 12.7%, annualized, which is just a hair lower than the 12.9% return on the

S&P 500. But get this: the annualized volatility is just 9.2%, compared

to 13.7% for the S&P 500. That’s a big difference.

Check out Barclays’ graph of rolling 5-year annualized returns, and you’ll

see what I’m talking about. With this product you would have missed out on some

of the froth of the dot-com bubble, but you would never have gone into negative

territory over any five-year period. The S&P 500, on the other hand, plunged

below zero in 2002, on a five-year basis, and only got back into positive territory

last year.

If you want to invest in the stock market, then, but you are worried about

the size of your potential losses, this could be a smart way to go.

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