New PowerShares Nasdaq BuyWrite ETF Is at Odds with Itself

PowerShares launched the NASDAQ 100 Buy Write ETF (PQBW).

The above chart is from the PowerShares site and shows how the index has fared versus the NASDAQ 100 since 1999. The second chart is shorter and covers as far back as big charts can go for the BXN index that underlies PQBW.

I have never traded QQQQ personally or for clients. I think of the NASDAQ 100 as being a proxy for tech, it is about 65% tech, and in that light I don't think it is the best proxy for tech.

Typically tech is a place where people seek to add outsized returns to their portfolio as opposed to something like utilities (utilities get their occasional day in the sun but but there are more "sexy" stories in tech than utilities).

Buywrite exposure is usually thought of for reducing portfolio volatility and maybe adding some yield.

The (hopefully) outsized returns combined with (hopefully) lower volatility would seem to be at cross purposes-- at least that is how it seems to me.

In sorting through products that come, to the extent you even do that, it makes sense to think about where volatility should be allocated to and where it should not. No one buys Brazil or Taiwan for low octane just as no one buys a preferred stock for the juice.

That is not to say that within a sector like tech you wouldn't want to have a little less volatility at times or a little more. The way to have less might be with a non-specialized ETF and the way to have more might be to build out that part of the portfolio with smaller nichier stocks.

The obvious question would be why not use PQBW when you really want to reduce tech sector volatility? Well you could but I don't think that is too appealing. You would think that the reason to underweight volatility in a sector would be because you think it won't do well but also embedded in that underweight needs to be the understanding that you would likely mis-time a big turn up, I would miss it too.

By owning something that by design can't keep up with up a lot you compound being underweight/missing the big turn when it comes. But you may view PQBW differently.