ETF Hedged Covered Call Portfolio
Trade Team Bios Kevin G. Simpson Chief Investment Officer Kevin Simpson has been the President and Chief Investment Officer of Capital Wealth Planning, LLC since establishing the firm in 2005. Originally from Philadelphia, Pennsylvania, Kevin has been investing in options since he began his career at W.H. Newbold's Son & Co. in 1992. After his time at W.H. Newbold's Son & Co Kevin spent 7 years with Wheat First Butcher Singer (Subsequently Wells Fargo) where he helped institutions and high-net worth individuals plan and achieve their financial goals through option centered strategies. Following his time at Wheat First Butcher Singer Kevin spent several years at Sterling Financial before establishing Capital Wealth Planning. Over the years, Kevin has shifted Capital Wealth Planning away from a financial planning orientation to an established investment management firm, offering separately managed ETF and Equity portfolios that are complemented with a yield enhancing covered call strategy. A graduate of The George Washington University majoring in Finance, Kevin applies institutional investment management strategies to diversified equity and option portfolios. Josh Smith, CFA Head Trader Josh is responsible for the oversight and management of the trading of the firm s investment strategy. Prior to joining CWP Josh spent 6 years with First Financial Capital Advisors, the internal asset management arm of First Financial Bank. While at First Financial Capital Advisors Josh oversaw roughly $500M in assets as the lead portfolio manager for the International Global Focused SMA and the Pure Equity SMA, both strategies employed covered call programs to enhance yield and cover fees. Josh also served as co-portfolio manager of the Large Cap Core Mutual Fund. During a portion of his college experience and career in finance Josh served in the U.S. Army National Guard for 8 years with deployment to the Middle East and received an honorable discharge. Josh received his B.S. in Finance from Miami University of Ohio. He is a CFA charter holder, as well as, a member of the CFA Institute and CFA Society of Cincinnati. 2
Firm Profile Capital Wealth Planning is an independent, fee-only Investment Advisory firm registered with the Securities and Exchange Commission. CWP provides sub-advisory investment services to high net worth individuals, pensions, profit sharing plans, trusts, estates, charitable organizations, and corporations. CWP s strategic focus is concentrated on providing proprietary investment products and services for institutional investment platforms. CWP realizes that as markets and environments change, the ability to adapt is crucial. CWP specializes in covered call strategy and that allows our firm to focus solely on what we do best; increase the yield of the portfolio. Capital Wealth Planning exists at the forefront of implementing covered call strategies on our proprietary ETF Income and Enhanced Dividend Income Portfolios, as well as concentrated equity holdings. Above all else, CWP s strategic partners and clients are our number one priority and our firm takes that very seriously. CWP s success is dependent on your satisfaction. A teammate like relationship allows our firm to establish highly personalized sub-advisory relationships, coupled with customized portfolios composed of innovative investment opportunities, which generate monthly cash flow and reduce risk in the client s portfolio. (See Disclaimer) A teammate like relationship allows our firm to establish highly personalized sub-advisory relationships.
Portfolio Design CWP s ETF Covered Call Portfolio is designed as a risk management strategy, which means, as the market moves appreciably higher, the resulting risk-reward from market exposure declines as the relationship is inversely correlated. Risk management is one of the most underutilized techniques on the street, as it is unfashionable or not attractive to not be all-in the market as it makes new high after new high. To combat this, CWP has built-in a mechanism to reduce risk profile as the market consistently reaches higher levels. CWP s process of achieving this objective is multi-fold; CWP can either sell or reduce existing positions, buy a non-correlated asset (i.e. bonds), or an inversely correlated asset (i.e. short position on a large index, S&P 500). Features of the portfolio: Features a combination of 6-11 fixed income, equity, sector, and hedging ETFs Utilizes covered call writing for yield enhancement and hedging. Covered call writing is more active at higher levels of volatility Quick adjustments can tactically be made to the portfolio s beta by modifying the asset and sector allocation. This can be advantageous when experiencing inflation or a volatile interest rate environment Higher total return on a risk-adjusted basis. Meaning CWP has a lower (STD DEV) level of risk and can achieve competitive compound annual growth in comparison to a traditional balanced portfolio Can be an alternative to long duration fixed income, especially in a rising interest environment
Broad Diversification The portfolio typically consists of 6-11 Exchange-Traded Funds that provide exposure to thousands of individual securities. Downside Protection Quick adjustments can tactically be made to the portfolio s beta by modifying the asset and sector allocation. Monthly Cash Flow Production By entering into contracts to sell our investments at a higher price, one month into the future, we earn consistent income.
Covered Call Income Enhancement Writing covered calls provides a relatively conservative, proven strategy for generating monthly cash flow on securities that you own. Essentially, selling covered calls help investors to generate cash flow. The strategy is similar to collecting rent while the asset reaches the projected target-selling price. This sell options strategy provides the buyer with the right to buy your security at an agreed upon higher price, typically one month in the future. According to published research, the option contract often expires at the end of the period, allowing you to simply keep the rent. Historical returns have proven this strategy has been consistent in delivering returns of 1-3% annually as an enhancement to dividends and capital appreciation. (See Disclaimer)
CWP ETF Covered Call Allocation 7/31/2015 ishares 3-7 yr Treasury (IEF) 5.0% 3.0% 4.0% 8.0% 8.0% 8.0% 4.0% ishares 7-10 yr Treasury (IEF) ishares Barclays 20+ Treasury (TLT) 5.0% 10.0% Proshares Short S&P 500 (SH) SPDR Trust (SPY) SPDR Health Care (XLV) SPDR Consumer Staples (XLP) 45.0% SPDR Utilities (XLU) Wisdom Tree Japan Hedged Equity (DXJ) Cash
Annualized Total Return/Net of Fees 12/31/2007-7/31/2015 40% 30% 20% 10% 0% -10% -20% -30% -40% -50% 2008 2009 2010 2011 2012 2013 2014 2015 YTD 5.24% 5.93% 6.54% 5.06% 7.84% -2.02% 5.64% 0.60% -13.93% 22.05% 11.56% -3.19% 5.08% 14.90% 3.23% 2.54% -37.00% 26.46% 15.06% 2.11% 16.00% 32.39% 13.70% 3.36% Returns for S&P 500 and Barclay AGG are adjusted for dividends, splits and calculated on a total return basis. Standard Deviation is based on monthly returns and represented on an annualized basis
Cumulative Total Returns/Net of Fees vs. Std. Deviation 12/31/2007-7/31/2015 S&P 500 CWP ETF Barclay US AGG -5% 5% 15% 25% 35% 45% 55% 65% 75% Barclay US AGG CWP ETF S&P 500 Cumulative Performance 40.11% 45.00% 68.96% STD DEV Annualized 3.48% 9.77% 16.37% Returns for S&P 500 and Barclay AGG are adjusted for dividends, splits and calculated on a total return basis. Standard Deviation is based on monthly returns and represented on an annualized basis
Interest Rates (10-Yr Treasury) Cumulative Return CWP ETF vs. S&P 500 and S&P 500/Barclay AGG(60/40) 12/31/2007-7/31/2015 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% Interest Rates (10-Yr Treasury) S&P 500 S&P 500/Barclay AGG CWP ETF SMA $1,700,000 $1,600,000 $1,500,000 $1,400,000 $1,300,000 $1,200,000 $1,100,000 $1,000,000 $900,000 $800,000 $700,000 $600,000 $500,000 $400,000 $300,000 $200,000 $100,000 Returns for S&P 500 and Barclay AGG are adjusted for dividend, splits and calculated on a total return basis.
Covered Call Basics Covered call writing is considered a neutral-to-moderately bullish investment strategy. Investors can leverage (covered) equity assets in their portfolio by writing option contracts. This allows the investor to effectively control the standard deviation (risk) of their portfolio by managing upside potential in exchange for downside protection, while receiving annual cash flow distributions from writing option contracts. Here s how it works: One call option contract represents 100 shares. The writer of the option receives cash (premium) for selling the call. The writer is now obligated to sell the underlying shares at the strike price assigned to the call. This target is strategically managed by CWP Traders. Assuming the option is assigned, upside profit potential is capped to the premium received from the call s sale plus the difference between its strike price and the stock purchase price. If the option is not exercised, it will expire out of the money and with no value; the investor keeps the premium. The break-even point is the underlying stock price equal to the purchase price of the underlying shares less the premium received. The downside loss can be substantial with any equity and comes entirely from owning the underlying shares. Covered call option premiums are inversely related to changes in volatility. As with any short option position, an increase in volatility has a negative financial effect on the covered call, while decreasing volatility has a positive effect. Time decay has a positive effect.
Definitions Exchange Traded Funds are investment vehicles that provide the diversification benefits of mutual funds at typically much lower costs. Owning one share of an ETF provides you with diversification as if you owned a small portion of many individual securities. Each ETF is designed to track the performance of a particular stock or bond index and in some cases they can be sector specific. For example, owning one share of the S&P 500 SPDR Fund is similar to owning a portion of all of the companies listed in the S&P 500 Index. ETFs have many advantages over traditional open ended funds. These center around lower costs, greater tax efficiency, additional transparency and more efficient execution. Mutual funds can only be bought or sold at the end of the trading session and are priced only once a day. ETFs, on the other hand, trade on the exchanges and are priced throughout the day just like any individual security. More importantly, ETFs are rentable and we are able to sell covered calls against these holdings. A Covered Call Strategy writes (sells) call options that cover the underlying stock or fund positions. It can enhance portfolio returns under certain market conditions and can reduce overall portfolio volatility. A Hedged Position protects against big drops in portfolio value by owning investments that go up in price as the market drops (perfect negative correlation). The combination of option premiums (cash from sale of call options) and the hedged positions cushion price declines in down markets. The tradeoff is less participation in strong markets.
Disclaimer IMPORTANT NOTE: Capital Wealth Planning, LLC, (CWP) is a registered investment advisor with the U.S. Securities and Exchange Commission (SEC). Registration with the SEC does not imply that CWP or any individual providing investment advisory services on behalf of CWP possess a certain level of skill or training. Capital Wealth Planning may only transact business in those states in which it is registered or qualifies for an exemption or exclusion from registration requirements.. Individualized responses that involve actual or contemplated securities transactions or the rendering of personal investment advice for compensation will not be made absent compliance with all applicable investment adviser regulation requirements. Please contact the sender if there are any questions. CWP, LLC is an investment advisory firm located in Naples, Florida. Capital Wealth Planning and its representatives are in compliance with the current registration requirements imposed upon registered investment advisors by those states in which it maintains clients. Illustrations used in this document are hypothetical. The results achieved by individual clients will vary and will depend on a number of factors including the particular underlying investments and their dividend yield, option market liquidity, interest rate levels, implied volatilities, and the client's expressed return and risk parameters at the time the service is initiated and during the term. Past performance is not a guarantee of future returns. Investing in options involves risk that must be considered and reviewed with a professional prior to investing. This marketing piece is not intended for the giving of investment advice to any single investor or group of investors and no investor should rely upon or make any investment decisions based solely upon contents of the marketing piece. These illustration(s) of potential portfolio cash flow from a covered call option writing program is based on a model, not actual, portfolio. Covered call option cash flow for any portfolio will vary depending on actual portfolio positions, option premiums received, individual ETF price volatility, and general stock market volatility. Positions covered by call options may be called away, creating realized capital gains or losses. Cash flow is not guaranteed over any period. More information may be found in CWP s Form ADV. Option trading is not suitable for all investors. The booklet Characteristics and Risks of Standardized Options can be found at: http://www.cboe.com/resources/intro.aspx. Copies of this document may be obtained by your financial advisor or the Option Clearing Corporation, 1 N. Wacker Dr., Ste. 500, Chicago, IL 60606. 1-888-678-4667. Risks to Consider: The performance reflected herein represents preliminary composite data for the Capital Wealth Planning ETF Model Portfolio. The performance data herein may change as a result of being verified by a third party. All performance data is shown net of a maximum 1.65% annual fee. While compiled from actual accounts, the information has not been audited, reviewed, or otherwise verified by any third party and are not reported in accordance with Global Investment Performance Standards (GIPS). Actual advisor fees are deducted quarterly. Transaction costs and account maintenance fees could be charged and may vary across custodial platforms. While CWP takes considerable care in reducing the possibility of having shares called away, there can be no guarantee that the owner of the call option will not exercise the option prior to CWP s repurchase of the sold option. Covered Call writing can provide limited downside protection. It does not, however, eliminate downside risks. Options involve risk and are not suitable for all investors. Prior to opening an account with Capital Wealth Planning, clients are required to understand the risks associated with the purchase or sale of options by receiving the Options Clearing Corporation. Performance history is available. All income has been reinvested when possible. The results are calculated using simple monthly returns, ending value divided by beginning value adjusted for contributions to and distributions from the accounts, if any. Monthly results are then compounded to produce period return statistics. Clients should consult their account statements for information about how their actual performance compares to that of the model portfolios. Asset allocation does not ensure a profit or guarantee against a loss. The investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost.