2023-07-22 09:00:00 ET
Summary
- The Invesco S&P 500 BuyWrite ETF invests in public equity markets in the US, using a long/short strategy and derivatives such as options to create its portfolio.
- The ETF tracks the performance of the CBOE S&P 500 BuyWrite Index, investing in growth and value stocks of large-cap companies, and started in 2007.
- I give the PBP ETF a Strong Sell as there are better choices available. Three are compared against PBP in terms of yield and return.
(This article was co-produced with Hoya Capital Real Estate )
Introduction
I was looking at the Invesco S&P 500 BuyWrite ETF ( PBP ) as a possible competitor to the widely followed JPMorgan Equity Premium Income ETF ( JEPI ) as some investors do not like the fact the JEPI uses Equity-Linked-Notes (ELNs) for its income generation, where PBP uses a more standard process of writing Call options. Returns did not favor PBP but the real stop was the yield difference, a big reason investors pick JEPI over other Large-Cap focused ETFs.
I did the article but used the First Trust BuyWrite Income ETF ( FTHI ) instead as it ended up being competitive on yield without using ELNs but still behind on total return. I decided to look deeper into PBP to see if I could figure out why a buy/write ETF has a yield that currently is below the SPDR S&P 500 ETF ( SPY ).
Invesco S&P 500 BuyWrite ETF review
Seeking Alpha describes this ETF as:
It invests in public equity markets of the United States. It invests directly and through derivatives in stocks of companies operating across diversified sectors. It employs long/short strategy and uses derivatives such as options to create its portfolio. It invests in growth and value stocks of large-cap companies. It seeks to track the performance of the CBOE S&P 500 BuyWrite Index . PBP started in 2007.
PBP has just $98m in AUM and costs investors 49bps in fees. Its TTM Yield is just 1.2%, but the ETF sometimes makes capital-gains distribution in December.
Invesco describes their ETF and the underlying index as:
The Invesco S&P 500 BuyWrite ETF is based on the CBOE S&P 500 BuyWrite Index™ (Index). The Fund generally will invest at least 90% of its total assets in securities that comprise the Index and will write (sell) call options thereon. The Index is a total return benchmark index that is designed to track the performance of a hypothetical "buy-write" strategy on the S&P 500® Index. The Index measures the total rate of return of an S&P 500 covered call strategy. This strategy consists of holding a long position indexed to the S&P 500 Index 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. Dividends paid on the component stocks underlying the S&P 500 Index and the dollar value of option premiums received from written options are reinvested. The Fund and the Index are rebalanced and reconstituted monthly.
Source: invesco.com PBP & index
PBP holdings review
I will start with the Sector allocations, which, as I would expect, match up with the S&P 500 Index very well.
Thus the holdings match up well too.
The Top 20 comprised 41% of the portfolio's weight; the bottom of the 500+ positions only 9%. Currently PBP is short 222 SPX Mini contracts with a strike of $443. These are European-style contracts, meaning they cannot be exercised against PBP until expiration day, which is usually the 3rd Friday each month. Unless the S&P 500 Index drops before then, PBP will have to buy these options back as they are currently ITM.
PBP distributions review
The regular quarterly payout has ranged between $.05-.10 most times, with several year-end bonus payments source from capital gains. Not surprisingly, Seeking Alpha gives PBP a "D-" grade for these results.
Where is the yield?
The yield of 1.2% doesn't reflect the fact PBP has a history of paying out special dividends, the last being at the end of 2021. When you include these, the yield looks like this.
Looking at the Invesco dividend data, they list SCG/LCG as the source for the special distributions. Since 2016, all special distributions occurred at year-end, which is the policy listed for all Invesco funds. The yield drops occur when there was no special payment, as was the case in both 2020 and 2022.
The Financial Highlights PDF contained the following.
With the Fiscal Year ending in April, payments align with that date, not the yearly calendar. The Accounting rules for written options were disclosed as such (edited by author):
When the Fund writes a covered call option, an amount equal to the premium received by the Fund is recorded as an asset and an equivalent liability in the Statements of Assets and Liabilities. Realized and unrealized gains and losses on call options written are included in the Statements of Operations as Net realized gain (loss) from and Change in net unrealized appreciation (depreciation) of Option contracts written.
Source: connect.rightprospectus.com/Invesco PBP
For the year ending last April, PBP reported $3.39m in option premiums and $3m loss on open option positions. The latter becomes more likely when the market is rising. Since the policy is writing options on the SPX Index at or near to its closing price when rolled or written, the income, thus yield, will be best in flat to down markets; otherwise PBP is constantly closing out ITM options, most likely at a loss. Even ignoring the loss, option premiums are only generating a 3+% ROI, a fraction of what other option-writing funds earn.
Portfolio strategy
Looking at any fund by itself can be helpful but comparing it to others with similar strategies should always be part of the due diligence done when considering a new holding or reviewing a past purchase. With that in mind, I compared PBP against the following S&P 500 Buy/Write funds.
- Global X S&P 500® Covered Call ETF ( XYLD )
- Nuveen S&P 500 Dynamic Overwrite Fund ( SPXX )
- Nuveen S&P 500 Buy-Write Income Fund ( BXMX )
All four benchmark against the CBOE S&P 500 BuyWrite Index.
Factor | PBP | XYLD | SPXX | BXMX |
AUM | $99m | $2.9b | $295m | $1.4b |
Fees | 49bps | 60bps | 89bps | 89bps |
Yield | 1.10% | 9.49% | 7.45% | 6.95% |
Option coverage target | 100% | 100% | 35-75% | 100% |
Estimated Coverage | 100% | 100% | 57% | 99% |
Even SPXX, while writing options on only 50-70% of its assets, has a far better yield. My investigation of PBP did not discover the why unfortunately, but that came less important after looking at just these funds' CAGRs. This how they have performed over the past decade.
So, not only does PBP generate the least amount of income for investors, they provided the lowest CAGR too. Despite having the best StdDev, it wasn't enough to offset the poor return, thus giving PBP the worst set of risk ratios.
So while I could not for sure pin down why PBP's yield is so low when it follows the same index as some of the others, its subpar returns makes that factor irreverent. I give the PBP ETF a Strong Sell as there are better choices available.
Final thought
Some might be wondering why I did not include the JPMorgan Equity Premium Income ETF. The answer? Not enough history. I did add it to a PV screen just to see how it compared: both SPXX and BXMX have done better since JEPI started in May of 2020.
For further details see:
PBP: A Buy-Write Fund With 1% Yield