Understanding Yield-Strategies Using the S&P 500
Transcript of Understanding Yield-Strategies Using the S&P 500
Understanding Yield-Strategies
Using the S&P 500
Confidential – may not be distributed without the consent of BetaShares Capital 2
Disclaimer
The information contained in this document is general information only and does not
constitute personal financial advice. It does not take into account any person’s financial
objectives, situation or needs. It has been prepared with all reasonable care by BetaShares
Capital Limited (ABN 78 139 566 868, Australian Financial Services Licence No. 341181)
(“BetaShares”). The information is provided for information purposes only and should not
be construed as an offer or solicitation. BetaShares assumes no responsibilities for errors,
inaccuracies or omissions in this document. Performance and statistical results noted are
unaudited. Past performance is not indicative of future performance. Investments in
BetaShares Funds are subject to investment risk and investors may not get back the full
amount originally invested. Any person wishing to invest in BetaShares Funds should
obtain a copy of the relevant PDS from www.betashares.com.au and obtain financial advice
in light of their individual circumstances.
Confidential – may not be distributed without the consent of BetaShares Capital 3
Necessity is the mother of innovation
1. Investors need more income and less volatility as they age
2. Typically limited yield available from US stocks
3. Interest rates have been declining and are at historic lows
4. Recent market events have shown how volatile equities can be
5. Investors are finding it difficult to rely upon traditional exposure to cash, bonds or equities to deliver adequate income with reasonable volatility
6. A different approach is available
Confidential – may not be distributed without the consent of BetaShares Capital
A solution: enhance yields and reduce risk from shares
Potential for greater yield than dividends alone in most market conditions
Retain exposure to US equities The opportunity for some capital appreciation
Reduced volatility
Downside risk management
Equity Income Strategies – a Conservative Approach to
Equity Investing
4
Confidential – may not be distributed without the consent of BetaShares Capital 5
• Additional income from selling away some of the upside potential
• Buying a share and simultaneously selling, or “writing”, call options
• The investor is selling to the buyer of the option, for a premium, the
right to buy the relevant share
• Option “premiums” provide an additional source of income to the
investor
• In addition, option premium earned will partially hedge against any
decline in the price of the relevant shares
How can an investor earn higher income from
shares?
Confidential – may not be distributed without the consent of BetaShares Capital 6
BetaShares S&P 500 Equity Yield Maximiser Fund
Confidential – may not be distributed without the consent of BetaShares Capital 7
S&P 500 Yield Maximiser Fund – exposure to the
biggest stocks in the US, with potential for higher
income!
Confidential – may not be distributed without the consent of BetaShares Capital 8
Equity Yield Maximiser Fund offers competitive
levels of income combined with reduced volatility
Dividends on passive
stock portfolio
Premium on call options
sold
UMAX Total Income
Sources of income in BetaShares Equity Yield Maximiser Fund
Distribution Yield (December Quarter): 1.6%
Past performance is not an indicator of future performance
Confidential – may not be distributed without the consent of BetaShares Capital
S&P 500 Equity Income Strategy – Total Returns
and Volatility
CBOE S&P 500 2% OTM BuyWrite Index (BXY)(1) v S&P 500: June 1998 – June 2014
Source: CBOE, (1) The BXY index portrays the total return of a buy-write strategy investing in a portfolio of stocks represented by the S&P 500 index,
along with call options over the S&P 500 index which are 2% out-of-the money. The returns from this index provide a general illustration of how an equity
income (buy write) strategy may perform in different market conditions. The BetaShares S&P 500 Equity Yield Maximiser Fund will use an equity income
strategy that contains elements of the BXY strategy, along with certain modifications that seek to optimise the strategy. As a result the strategy of the
BetaShares S&P 500 Yield Maximiser Fund is not identical to what is depicted here, and the performance described in this slide is not indicative of the
future performance of the Fund.
BXY
Equity
Income
Index
S&P 500
Index
Annual return
(%, p.a.)
11.0% 10.3%
Volatility (%, p.a) 14.4% 18.0%
Sharp Ratio (#) 0.76 0.57
Over the long term equity income strategy using options produced better returns with less
volatility than an equity only strategy
9
Confidential – may not be distributed without the consent of BetaShares Capital 10
October 2007 – April 2009
Example: S&P 500 Equity Income Strategy
outperforming in a bear market
40
50
60
70
80
90
100
110
Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09
CBOE S&P 500 2% OTM BuyWrite Index (BXY)(1)
S&P 500 Total Return Index
-33%
-46%
Source: CBOE, (1) The BXY index portrays the total return of a buy-write strategy investing in a portfolio of stocks represented by the S&P 500 index,
along with call options over the S&P 500 index which are 2% out-of-the money. The returns from this index provide a general illustration of how an equity
income (buy write) strategy may perform in different market conditions. The BetaShares S&P 500 Equity Yield Maximiser Fund will use an equity income
strategy that contains elements of the BXY strategy, along with certain modifications that seek to optimise the strategy. As a result the strategy of the
BetaShares S&P 500 Yield Maximiser Fund is not identical to what is depicted here, and the performance described in this slide is not indicative of the
future performance of the Fund.
Confidential – may not be distributed without the consent of BetaShares Capital 11
June 1992 - July 1995
Example: S&P 500 Equity Income Strategy
outperforming in a modest bull market
80
90
100
110
120
130
140
150
160
May-92 Aug-92 Nov-92 Feb-93 May-93 Aug-93 Nov-93 Feb-94 May-94 Aug-94 Nov-94 Feb-95 May-95
47%
43 %
CBOE S&P 500 2% OTM BuyWrite Index (BXY)(1)
S&P 500 Total Return Index
Source: CBOE, (1) The BXY index portrays the total return of a buy-write strategy investing in a portfolio of stocks represented by the S&P 500 index,
along with call options over the S&P 500 index which are 2% out-of-the money. The returns from this index provide a general illustration of how an equity
income (buy write) strategy may perform in different market conditions. The BetaShares S&P 500 Equity Yield Maximiser Fund will use an equity income
strategy that contains elements of the BXY strategy, along with certain modifications that seek to optimise the strategy. As a result the strategy of the
BetaShares S&P 500 Yield Maximiser Fund is not identical to what is depicted here, and the performance described in this slide is not indicative of the
future performance of the Fund.
Confidential – may not be distributed without the consent of BetaShares Capital 12
June 1993 - June 1994
Example: S&P 500 Equity Income Strategy
outperforming in a range bound market
70
75
80
85
90
95
100
105
110
115
Jun-93 Sep-93 Dec-93 Mar-94 Jun-94
7%
4%
CBOE S&P 500 2% OTM BuyWrite Index (BXY)(1)
S&P 500 Total Return Index
Source: CBOE, (1) The BXY index portrays the total return of a buy-write strategy investing in a portfolio of stocks represented by the S&P 500 index,
along with call options over the S&P 500 index which are 2% out-of-the money. The returns from this index provide a general illustration of how an equity
income (buy write) strategy may perform in different market conditions. The BetaShares S&P 500 Equity Yield Maximiser Fund will use an equity income
strategy that contains elements of the BXY strategy, along with certain modifications that seek to optimise the strategy. As a result the strategy of the
BetaShares S&P 500 Yield Maximiser Fund is not identical to what is depicted here, and the performance described in this slide is not indicative of the
future performance of the Fund.
Confidential – may not be distributed without the consent of BetaShares Capital 13
July 2013 – June 2014
Example: S&P 500 Equity Income Strategy lagging
in a strong bull market
90
95
100
105
110
115
120
125
Jun-13 Sep-13 Dec-13 Mar-14
22%
18%
CBOE S&P 500 2% OTM BuyWrite Index (BXY)(1)
S&P 500 Total Return Index
Source: CBOE, (1) The BXY index portrays the total return of a buy-write strategy investing in a portfolio of stocks represented by the S&P 500 index,
along with call options over the S&P 500 index which are 2% out-of-the money. The returns from this index provide a general illustration of how an equity
income (buy write) strategy may perform in different market conditions. The BetaShares S&P 500 Equity Yield Maximiser Fund will use an equity income
strategy that contains elements of the BXY strategy, along with certain modifications that seek to optimise the strategy. As a result the strategy of the
BetaShares S&P 500 Yield Maximiser Fund is not identical to what is depicted here, and the performance described in this slide is not indicative of the
future performance of the Fund.
Confidential – may not be distributed without the consent of BetaShares Capital
What are the main risks?
• Holding underlying shares so exposed to
same risks as if held U.S. shares, although
volatility should be lower due to additional
income
• Complexity of implementing and managing
strategy
• Upside potential of Fund is limited
• Currency risk
Please refer to PDS for further information on risks
14
Confidential – may not be distributed without the consent of BetaShares Capital 15
Clients who may be suited to an equity income strategy
1. Clients focused on diversified market exposure combined with high yield
2. Clients looking for a more conservative equities exposure
3. Clients looking for relatively high and regular income
4. Advisers with clients on platforms seeking high yield, low turnover, market exposure
More broadly, clients seeking higher income, lower risk from an U.S. equities portfolio
Characteristics of an equity income strategy are particularly relevant to retirees and
SMSFs, although suitable for a wide range of investor types
15
Confidential – may not be distributed without the consent of BetaShares Capital 16
The Benefits of Australian Domiciled Funds
BetaShares/Investment Trends ETF Report for 2013 found that US tax forms were
the #1 problem investors encountered with ETFs (i.e. cross-listed ETFs)
W-8 BEN form is renewable every
3 years in order for investors in
US-domiciled funds to benefit
from reduced withholding tax (i.e.
from 30% to 15%)
Investors in Australian Domiciled
Fund (e.g. S&P 500 Yield
Maximiser Fund) do not need to
fill out a W-8 BEN form to benefit
from reduced US withholding tax
Confidential – may not be distributed without the consent of BetaShares Capital 17
FOR MORE INFORMATION Website
Visit www.betashares.com.au
Blog: www.betasharesblog.com.au
Twitter: @betashares
1300 487 577 (within Australia)
+61 2 9290 6888 (outside Australia)
Confidential – may not be distributed without the consent of BetaShares Capital 18