With U.S. markets up over 300% since the March 2009 lows and continuing to set new all-time highs, where are investors to look for future returns?1 Although U.S. valuations are stretched compared to developed international (specifically Japan) and emerging markets, we think the pro-growth policies and potential tax cuts put forward by the new administration can help drive earnings growth for U.S. companies, which in our opinion would help the market rally continue.
With investing, nothing can be certain, and because valuation risks are elevated in the U.S., we think it is prudent to incorporate a risk-managed approach such as an option strategy, which can help mitigate risk. Also, when investors perceive upside potential may be constrained as a result of past gains and high current valuations, options writing strategies that generate returns from premiums might make sense, even though the upside is capped.
The WisdomTree CBOE S&P 500 PutWrite Strategy Fund (PUTW)
The WisdomTree CBOE S&P 500 PutWrite Strategy Fund (PUTW) seeks investment results that, before fees and expenses, generally correspond to the performance of the CBOE S&P 500 PutWrite Index (PUT). PUTW invests in one- and three-month Treasury Bills and sells or “writes” S&P 500 Index put options. The Fund writes European-style options, and the number of put options sold is chosen to ensure full collateralization. Also, the options are written “at the money,” or at the current level of the S&P 500 Index, on a monthly basis.
The option premiums the Fund receives from selling puts can help mitigate the negative effects of investing only in investment vehicles that track the S&P 500 Index. Historically, PUT, the index PUTW is designed to track, had returns similar to the S&P 500 Index but with less risk, so blending the two could offer attractive risk-adjusted returns.
