The Exchange Traded Fund (ETF) is one of the most exciting and innovative products to come out of the securities industry in years. An ETF represents shares of ownership in portfolios of securities which are designed to generally correspond to the price and yield performance of their underlying portfolio…either the broad market, industry sector, regions, investment styles or international markets. ETFs give investors the opportunity to buy or sell an entire portfolio of stocks, bonds, currencies and other assets within a single security, as easily as buying or selling a share of stock. They offer diversification through a wide range of investment opportunities with much greater flexibility than mutual funds.
Despite the attractiveness of this relatively new investment vehicle, investments in ETFs remain fundamentally investments in the stock market, which make them subject to the same opportunities and risks as the underlying securities they contain. In other words, despite the inherent advantages of diversification, ease of trading and cost efficiency, the investment performance of ETFs, for better or for worse, will only mirror the same performance of the securities that comprise them.
Many investment experts and economists have been making public statements about investor expectations for the long-term future. This includes, among many others, two prominent individuals: Warren Buffett, Chairman of Berkshire Hathaway, often referred to as the “Oracle of Omaha” for the incredible investment success he has achieved over the past four decades, and John Templeton, now deceased mutual fund pioneer and founder of the Templeton mutual funds.
Unfortunately these experts are strongly suggesting that investors should not hope for anywhere near the level of investment returns from the stock market that they have come to expect in the past. Buffett and Templeton believe that, at best, investors may realize from five-percent to seven-percent annual returns before taxes and inflation going forward. Thus, even with the advantages ETFs offer us, keeping our money and making it grow may become more difficult than it has been in the past for many years to come.
If this prediction from such highly qualified experts is close to accurate, new ideas will be needed if stock market investors are to have any hope of achieving double-digit returns in the future.
The program presented in this book is elegant in its simplicity and power-packed in its potential for the average investor. It involves two simple steps: (1) the use of Exchange Traded Funds as the investment vehicle of choice to obtain the requisite diversification needed by equity investors, and (2) the use of covered call option writing in conjunction with those Exchange Traded Funds to yield consistent double-digit returns on investment.
With ETFs both the novice and the seasoned investor can achieve portfolio diversification as well as focus (e.g., broad market, industry sectors, regions, investment styles, or international) without the need to develop personal expertise in financial analysis and stock selection techniques. It also means there is no need to devote large amounts of time to researching individual stocks.
By writing covered calls on the ETFs you own or acquire, consistent double-digit returns are possible in a market where total returns from capital appreciation and dividends alone may be far less, if the experts are correct in their beliefs.
Covered Call Writing With Exchange Traded Funds (ETFs) is designed both for people who already have investment assets as well as those who are accumulating money on a regular basis. It is for those who want first to preserve it from the effects of inflation and also want to make it grow and to add to their wealth while assuming an acceptable amount of risk commensurate with the return.
This book is believed to be the only title exclusively devoted to the subject of covered call option writing with Exchange Traded Funds. It presents the subject material in a manner easy for the reader to understand and with a personal investment program for implementation by the reader. Computer software templates using Microsoft Excel® are provided to assist the user in formulating investment decisions on covered call writing opportunities and for tracking results.
The purpose of this book is to serve as a hands-on, practical workbook for individuals who seek to achieve a consistent double-digit total return compounded annually, year after year, on the equity portion of their investment assets, represented by the ownership of ETFs. Given market expectations, it provides what may be one of the best opportunities to achieve double-digit investment returns in the future.
By writing (selling) call option contracts on ETFs, the investor receives current income from option premiums, in addition to any dividends on the securities owned by the ETF, and a defined amount of capital appreciation potential on the ETF. This approach is more conservative than simply owning equity investments alone. It can provide more stable, predictable, and higher investment returns than equity ownership alone in a slower growth stock market with the diversification that could otherwise only be obtained by owning a large number of individual stocks. This approach provides the diversification that has long been the hallmark of mutual funds with the added advantage of providing significant additional income from option premiums. Covered calls can be written on ETFs, but not on mutual fund shares.
How important is it to earn consistent double-digit returns on our investable funds? Let’s examine this by assuming that an investor has an initial investment of $100,000 in a ROTH IRA account. Therefore there are no taxes to pay on investment gains and income. The difference in the value of the account over many years is staggering when applying different compounded annual returns. Consider the implications of earning a six percent return compared with a fifteen-percent compounded annual return…one that would have been considered to be a minimum expectation in the 1990s:
10 $179,085 $ 404,556
20 $320,714 $1,636,654
30 $574,349 $6,621,177
After ten years the person who earns fifteen-percent compounded annually has accumulated well over twice the amount of the person who earns six-percent. After twenty years, the fifteen-percent return grows to more than five times the six-percent return. And, for investors fortunate enough to have an even longer time horizon, after thirty years there is greater than an eleven-time difference. This clearly demonstrates the multiplier effect of not only earning a return on your principal, but also earning a return on your return…the magic of compounding. Albert Einstein called compounding “The most powerful principle I ever witnessed.” Ben Franklin called it “The Eighth Wonder of the World.” There doesn’t seem to be any doubt that they were correct, given the magnitude of these figures.
The program provided in this book to assist you in achieving double-digit compounded annual returns might be more conservative or more aggressive than your current investment approaches. Suffice it to say for now that the program involves more risk than placing your money in a bank, but less risk than simply being invested in the stock market.
We should never underestimate the ability of inflation to diminish our purchasing power over long periods of time. By achieving a double-digit annualized return, an investor could expect to outpace inflation many times over. Most people would be able to add considerably to their net worth each year or could produce extra income to cope with rising expenses and improve their overall standard of living.
This book is for those who believe that long-term inflation is always a risk to overcome, but are concerned that the stock market alone may not provide the returns that it has in the past. It is for those of you who hope to still achieve a double-digit annual return on your investments despite the predictions of a slower growth market. If you are willing to take some risk to accomplish this, but not as much risk as just being in the stock market alone, then this book is for you.
By using the tools in this book, you will have a viable means of working towards this worthwhile objective.