BXY and PUT Indexes – Higher Returns and Lower Volatility

In my discussions with investors concerning their goals for their investment portfolios, I hear investment goals stated in many different ways, but for many people the investment goals can be summarized simply as follows – over the long-term, many investors want higher returns with lower volatility.

As shown in the first two charts below, both the CBOE S&P 500 2% BuyWrite Index (BXY) and the CBOE S&P 500 PutWrite Index (PUT) have had higher returns and lower volatility than four indexes that do not use listed index options – (1) S&P 500 Index, (2) Citigroup 30-year Treasury Index, (3) MSCI EAFE Index, and (4) S&P GSCI Index.

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In the period over the past 25 years, a one-dollar investment on June 30, 1988, would have grown (on June 30, 2013) to $12.60 for the PUT Index, $12.27 for the BXY Index, $10.23 for the S&P 500 Index, and $3.29 for the MSCI EAFE Index (in US$).12

One of the key factors behind the strong relative performance for eth BXY and PUT indexes has been the fact that the S&P 500 options generally have been richly priced, with implied volatility usually exceeding subsequent realized volatility.  For more information on this topic, and links to papers by Asset Consulting Group, Callan Associates, Cambridge Associates, and Hewitt Ennis Knupp, please visit www.cboe.com/benchmarks.