Coming into 2020, RIAs and Financial Advisors must continue to help their clients face the same conundrum. The US equity bull market since March 2009 is unprecedentedly long. But the many prognosticators espousing dire predictions have continued to be wrong for quite awhile. The goal, then, is to maintain exposure to US equities while mitigating potential drawdowns. Depending on the age, financial circumstances and risk tolerance level of the client, an additional goal is to produce income, at least some of which can be distributed with minimal tax consequences.

Most published experts seem to agree that we are currently in an unusual environment where these objectives of reducing risk and raising income cannot be addressed by the traditional method of re-allocating some exposure from equities to fixed income. With rates at unprecedentedly low levels, bonds do not satisfy many clients' income requirements. Worse, many bond and asset allocation analysts have opined recently that current bond prices may have more downside risk than stocks because increases toward historic norms would drop the market prices of these bonds considerably. Corporates bear the additional downside of credit risk. The prevailing wisdom I'm reading from the bond analysts to whose newsletters I subscribe is that credit risk in corporate bonds is substantially uncompensated for in the coupon rates. This is because bondholders continue to chase after miniscule differences in yield. means of reducing downside risk and increasing distributable net income. Most of these involve using options.

There are at least a dozen of US ETFs now available that utilize options to implement various strategies to reduce risk relative to 100% long positions. Most also attempt to provide superior dividend yields to the income yields attainable in bonds. The most popular by AUM of these include ETFs with these ticker symbols: QYLD, PBP, HSPX, PUTW, SWAN, ACIO and TCHI. QYLD, PBP, HSPX, and TCHI use buy-write index fund strategies that employ index options: QYLD is based on the Nasdaq-100 index and the other three are based on the S&P 500 index. ACIO also uses a buy-write strategy but the underlying stocks portfolio contains 30 high-yield stocks and also uses protective puts to provide further protection against drawdowns. PUTW and SWAN both write options against US Treasury Bond portfolios but in very different ways, PUTW selling S&P 500 put options while the more conservative SWAN uses long-dated S&P 500 options for its equity exposure.

It may be surprising that QYLD using the Nasdaq-100 has drawn considerably more assets than any of the three based in the S&P 500, especially when you consider that it is offered by lesser well-known Horizon ETFs and the much older PBP is in the INVESCO ETF family. There may be other reasons but I attribute it to its superior price and income performance record. Nasdaq-100 returns during the past 11 years have been considerably higher than the S&P 500 while the option-risk premium of implied vs. realized volatility is higher on NDX options than on SPX options.

There is only one issue managers and investors may have with these ETFs using options strategies. All have fees exceeding 50 basis points. Trading index options has become so efficient that some advisors could effectively save the client money with a do-it-yourself strategy. Savvy Investor recently published an article that I co-wrote with Richard Greene, also of Global Finesse, that shows the advantages of going long QQQ while selling 2%-out-of-the-money NDX options. If you can understand what 2%-out-of-the-money NDX options are, then you may find it less expensive to implement this strategy yourself.