Tuesday, October 15, 2013

Buy-Write Funds: Better than Bonds

Eventually, the Fed will rein in its bond-buying program, and anyone holding traditional income assets, such as bonds, preferred stocks, utility stocks, and mortgage REITs, will be left wondering what happened to their so-called safe investments, warns Robert Hsu in Money Morning.

To counter this situation, we need to look to non-traditional methods of generating income. And one way to do that is with buy-write funds, also known as covered-call funds.

Buy-write funds are basically either closed-end mutual funds or exchange-traded funds that employ a covered-call options strategy. They trade just like stocks on an exchange, and that makes them easy to access in your brokerage account with just one click.

In the current upward-drifting market, I think selling covered-calls is one of the best ways to generate income and supersize your total return. But for many investors, playing the options game is a bit uncomfortable.

And while a covered-call strategy is both low risk and high probability, for some, the idea of selling options in their account is a little too daunting a proposition.

Buy-write funds essentially eliminate the trepidation associated with writing your own calls, because here the fund managers do the trading for you.

So, all you have to do to begin collecting the same kind of income from writing your own covered-calls is to buy one or more of the many outstanding buy-write funds available today.

Here are four to consider:

PowerShares S&P 500 BuyWrite ETF (PBP), yielding 4.09%

Madison/Claymore Covered Call & Equity Strategy (MCN), yielding 8.94%

Nuveen Equity Premium Opportunity Fund (JSN), yielding 9.19%

BlackRock Enhanced Dividend Achievers (BDJ), yielding 7.39%

The yield on these funds is very attractive. Even more attractive is the fact that many buy-write funds actually are selling at a discount to their net asset value.

It is cheaper to buy these funds than to buy the underlying stocks that these funds hold. That makes these closed-end funds on sale at current values, and well positioned to deliver solid capital appreciation in the future.

Perhaps one of the best features of buy-write funds, at least in the current climate, is that they offer investors shelter against a rising rate environment.

Unlike bonds, preferred stocks, utility stocks, mortgage REITs, and other high-yield income plays, these funds offer great growth potential and are less impacted by rising interest rates.

And the current income you'll collect certainly won't hurt. If you were to invest $100,000 in a good closed-end, buy-write fund, you could easily generate $850 a month, and possibly more in capital appreciation. And you can do it without actually ever writing a call option.

Subscribe to Money Morning here…

More from MoneyShow.com:

Sweet Spot for High Yield

Bet on Gundlach for Total Return

Calamos: A Convertible Opportunity

Robert Hsu on InvestorPlace More from The Party's Over for Cyclical Stocks New Tech Launch Date Crowded Being Fearless and Turning $1,000 into $400,000

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