The year 2015 saw a shaky start on the bourses, bringing volatility back into the market. The relentless slide in crude oil prices. political turmoil in Greece, crisis in Russia, global economic growth concerns, and rising credit spreads are weighing on investors’ sentiments lately.  

This is especially true as the S&P 500 and Dow Jones Industrial Average slipped into red, losing 0.7% and 0.5%, respectively, since the start of the New Year. The first three trading days saw the worst decline for the stocks followed by a two-day strong rally. However, the benchmarks again dipped on Friday on the falling U.S. wage data for December despite robust hiring (read: ETFs with Happy/Horrid Start to the New Year ).

Further, volatility is expected to rise in the coming weeks as the slump in oil prices shows its adverse effect on Q4 earnings. As per the Zacks Earnings Trend, the earnings estimate shows 1.2% growth, down sharply from 9.6% growth projected in early October and 6.9% reported in Q3. Revenues will likely be down 0.5% on modestly higher net margins.

In fact, the magnitude of negative revisions was the highest in recent quarters and the weakness is broad-based with the estimates of 13 out of 16 Zacks sectors witnessing negative revisions. Among the sectors, energy has seen the highest negative estimate revision over the past three months, followed by materials and industrial products.

Despite the volatility, the U.S. economy now looks much stronger than was in the past decade and is on track for the strongest annual job growth since late 1999. Stepped-up manufacturing and industrial activities, renewed confidence in the housing market, and rising consumer confidence could propel the stocks higher once again (read: 5 Must-Have ETFs for 2015 ).

In such a backdrop, investors are looking for investments that provide capital appreciation opportunities in the equity world with simultaneous downside protection. A gainful option for now could be the ‘Buy-Write’ strategy.

Buy-Write Strategy in Focus

A buy-write is an option strategy that involves buying a stock or a basket of stocks and then selling or writing call options on those same assets. With this process, the portfolio aims to generate additional monthly income from the call option (premiums collected). If the product stays flat or declines slightly, investors keep the premium and their stock. However, if prices rise, investors only receive the premium and the stocks are sold at the price that was agreed upon in the covered call.

As such, the products would probably underperform in the bull markets, as this strategy eats away the gain potential especially in a short time frame. However, investors seeking to make a play on the broad U.S. equity indices using this strategy could consider the following ETFs (read: Best ETF Strategies for 2015 ):

PowerShares S&P 500 BuyWrite Portfolio ETF ( PBP )

This fund tracks the CBOE S&P 500 BuyWrite Index, which measures the performance of a hypothetical buy-write strategy on the S&P 500 Index. This strategy includes holding a long position of the stocks in the S&P 500 and selling a succession of covered call options, each with an exercise price at or above the prevailing price level of the S&P 500 Index.

The fund has amassed $394.6 million in AUM and trades in average daily volume of nearly 173,000 shares a day. Though the product is a bit pricier than other choices, charging 75 bps in annual fees, this could be making up in terms of yield. The ETF has an annual yield of 4.14% mainly due to the premium received by writing the call option.

Horizons S&P 500 Covered Call ETF ( HSPX )

This ETF seeks to match the performance of the S&P 500 Stock Covered Call Index, which  holds a long position in the stocks of the S&P 500 Index while at the same time, short (write) call options on option-eligible stocks in the S&P 500 Index.

This fund has accumulated $26.4 million in its asset base and charges 65 bps in fees per year from investors. Volume is light as it exchanges less than 14,000 shares in hand on average daily basis. The ETF has 2.66% in annual dividends.

Barclays iPath S&P 500 BuyWrite Index ETN ( BWV )

This is an ETN option and tracks the similar index as that of PBP. Unlike PBP, the ETN carries credit risk from the issuing institution — Barclays. The note is less popular and less liquid as depicted by its AUM of $12.4 million and average volume of under 2,000 shares. The ETN charges 0.75% in fees and expenses (see: all the Long-Short ETFs here ).

Bottom Line

These products are appropriate for investors seeking high levels of current income and a hedged exposure to the large cap U.S. equities. It is worth noting that the funds will lag significantly during a boom time, but will be an interesting choice in flat or declining markets, especially for investors seeking extra income in the current low rate environment.

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