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Smart Beta: Charles Stanley's top passive trades

Smart Beta: Charles Stanley's top passive trades

John Fletcher, senior ETP (exchange traded products) analyst at Charles Stanley, reveals his top ETP trades and how he uses options to enhance income

What have been your best exchange-traded product (ETP) trades and investments?

I had a good iShares index-linked gilt product, which I had some time ago. It springs to mind, because it was when I was worried about inflation being a genie that could get out of the bottle.

The market thought the same and at the time, it was about right. I made 35% after a couple of years of holding it.

I had PHAU – ETFS Physical Gold. I never go for futures-based ETFs because of the issues of contango and backwardation.

It’s still being held, and it’s going well for lots of clients at Charles Stanley. I’m backing it for a lot of reasons: gold will likely go up and it’s never out of the press, for example.

There are analysts saying its target price is $2,600 an ounce, and there’s still some distance to go to hit this. I also got the timing almost exactly right in terms of getting in and out. From a tactical perspective, that has been interesting.

How do you go about selecting which ETPs to use?

At Charles Stanley we have changed internal protocols with regards to ETFs, so clients and brokers can now only buy off a preferred list and these are only London Stock Exchange-listed products.

SPDR is a relative newcomer to the LSE, but it is on the preferred list.

The worry, though, is spreads and assets under management (AUM), which are always low on a new ETF.

It’s an uphill struggle to gain AUM at the expense of competition such as iShares, which has a first mover advantage.

What makes me nervous is if I recommend an ETF with less than £100 million in AUM. I worry if providers don’t continue to build this, as it could eventually be delisted.

That does worry me, although not as much with State Street, because it’s such a massive name in the US.

How do you enhance income with options trading?

A lot of my business is building portfolios and using covered writing strategies to add income. For example, I build a portfolio with a 4% yield then after 12 months of writing covered options against it, it’s nearer to 10%-12% including dividends.

In another portfolio, I’m running a weighted average yield of 2.84%, which I started in January. But so far, it has a yield of more than 8%.

A lot of positions expire in December. I will let them expire, or roll and move out, depending on the premiums that are around, although it’s difficult because volatility is so low.

I don’t tend to trade the FTSE – it’s too risky now because of the potential for shocks to the upside or downside.

Can you give an example of some of the option trades you’ve done?

I trade these on individual equities. So on Aviva, I’ve traded a covered call or a covered put.

You leave the position alone and hopefully then get a dividend as well as income from the options you’ve taken. I’ve had Man Group since January 2010. It has been a very poor performer, but I have continued to write options against it, which so far, has yielded 44% of initial outlay, per annum.

Do you think there are any developments needed in the ETP industry? What’s the future?

Ideas for ETFs have been done to death. What we are now seeing now is small ETFs going in the way of the dodo – being made extinct. The biggest will get bigger and the small will disappear.Look at how many FTSE 100 ETFs there are, there are a lot to choose from, but they do the same thing.

So unless there’s a real reason for the new ETFs, such as better tracking – that’s where new entrants are nipping at the heels of the bigger boys.

Trade reporting is also a real disappointment. I find the lack of over-the-counter trade reporting very frustrating. I’d like that to be addressed. I think regulators are getting a handle on it.

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