New exchange traded note tracks covered calls

PHILADELPHIA — In a further sign of how exchange traded products are chasing more exotic strategies, Barclays Bank PLC of London has unveiled an exchange traded note that provides investors with exposure to a covered-call-writing strategy. Launched last month with the help of the Chicago Board Options Exchange, the iPath CBOE S&P 500 BuyWrite Index ETN follows an index that attempts to measure the returns of a theoretical portfolio of Standard & Poor’s 500 stock index stocks that also systematically sells S&P 500 index call options against the portfolio. The covered-call strategy — which also is referred to as a buy-write strategy — can be used to enhance portfolio returns and reduce volatility, according to industry experts. It has been a particularly successful strategy recently for closed-end funds. The initial public offering in February of the Eaton Vance Tax- Managed Global Diversified Equity Income Fund, a closed-end fund from Eaton Vance Corp. of Boston, raised $5.5 billion, the largest closed-end-fund IPO ever. Like its sister fund, the Eaton Vance Tax Managed Diversified Equity Income Fund, which raised $2.63 billion when it was launched in November, it uses covered-call options. Such closed-end funds, however, can be expensive, said Jim Wiandt, president of Index Publications LLC of New York. The two Eaton Vance funds each have an annual expense ratio of 1.2%. The new buy-write ETN — which is similar to an exchange traded fund but is actually a senior, unsecured, unsubordinated debt security linked to the performance of an index and issued by Barclays Bank — has an expense ratio of 0.75%. “It is an extremely appealing strategy that up until now for retail investors has been ridiculously hard to access,” Mr. Wiandt said. It is a great vehicle for retail investors looking to hedge their risk, said Herb Blank, founder and president of QED International Associates Inc., an industry consulting firm in New York. Mr. Blank said it is so good that he wouldn’t be surprised if Barclays comes out with additional iPath notes that track other buy-write indexes such as the CBOE Russell 2000 BuyWrite Index, the CBOE DJIA BuyWrite Index or the CBOE NASDAQ-100 BuyWrite Index. Barclays won’t discuss future ETNs but in the past has made a point of saying that it intends to continue to develop its iPath lineup. The launch of the buy-write ETN brings to eight the number of ETNs it offers. Of course, there are potential drawbacks. The covered-call strategy, while it may reduce volatility, also can reduce upside potential, said David Elan, a principal with Windward Investment Management Inc., a financial advisory firm in Boston. A proponent of ETNs, Mr. Elan said he would have to see a few years of actual performance before he would consider such an investment. A track record is absolutely necessary, agrees Robert D. Williams, director of research for Sage Advisory Services Ltd. Co. in Austin, Texas. Once it has established a record — and assuming that that record is a good one — “there could be use for this in certain strategies,” said Mr. Williams, a proponent of exchange traded products. But investors could warm to the new product quickly, predicted one industry watcher. Investors are looking for products, such as the new ETN, which promise uncorrelated returns at a time when markets are moving more and more in tandem, said Richard Kang, a Toronto-based independent investment and risk consultant for fund management companies, and publisher of the betabrief.com. That is one of reason that assets of the ProShares group of exchange traded funds offered by Bethesda, Md.-based ProShare Advisors LLC passed the $3 billion mark in February — less than eight months after the group’s launch, he said. ProShare offers ETFs designed to provide short or magnified exposure to well-known market indexes.