Saturday, 16 January 2016

BMO US Put Write ETF, Anyone Else Out There Find This Absolutely Stupid?

A quick post on tomfoolery in the guise of an ETF.

I was looking through the 52 week highs/lows from Friday, and was astounded to find this.  This is a 1 yr comparison of the BMO US Put Write ETF vs. the S&P 500.  It's a fairly new ETF, having less than a 6 month trading history, but conceptually, this thing should not be hitting new highs as the S&P 500 hits new lows, and $VIX spikes to new highs.


















For the life of me, I cannot understand the absurdity behind this move.  Here's the profile from BMO:






















Reproducing the portfolio strategy below:

Portfolio Strategy

BMO US Put Write ETF has been designed to deliver an alternative income exposure by writing put options on an underlying portfolio of U.S. large cap equities. The ETF writes short-dated out-of-the-money put options by analyzing the available option premiums, while investing the portfolio in cash equivalents. The ETF may be subject to a loss if the stock prices decline significantly over the option period.


Here are the portfolio holdings and sector allocations (top holdings).  I note that 20% of the ETF's sector allocation is to short energy puts.

























Here is an excerpt from the portfolio strategy posted by BMO right on the ETF profile page (note the disclosure regarding what should happen to return as short puts move into the money, it's right there in plain view!):






















Anyone not familiar with the theory behind put writing should refer to the following:





















Here are my theories on what may be going:


  • (Canadian) Retail investors are scrambling into this ETF because it's going up (which is dumb)
  • (Canadian) Retail investors are drawn to this ETF because they mistakenly think that due to it's 100% collateralized US T-bill position, it's a fixed income equivalent
  • (Canadian) Retail investors love this ETF because it writes premium in USD's, and the USD is rising vs. the CAD
  • (Canadian) Retail investors are too lazy to figure out what this ETF actually does

My questions?

  • At what point do the pros running the ETF have to post margin against every single position going against them at the same time?
  • What happens to the collateral held by the ETF when this happens?
  • When will this ETF implode?

Stay Tuned...








2 comments:

  1. Do they limit their exposure to the amount of collateral they hold? That should reduce the risk of them "blowing up". I write puts as well but only in scenarios where I am ready and willing to buy the stock at that level. I really don't think this ETF should be a retail product!

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  2. That's a very good point, and I honestly don't know the answer, so I'm going to research it by way of reading the offering docs. My best guess is no, because it's a solution offered to retail disguised as a fixed income/ yield alternative product sold by a bank. I doubt they've structured the system to take delivery of the names they've written premium on, but I'm curious now.

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