Markets seem to be digging deeper into quicksand. The S&P 500 (SPY) has just joined the Nasdaq 100 (QQQ) and the Russell 2000 (IWM) in correction territory. Treasuries (TLT) have been here since January 2021, while gold (GLD) remains in a stubborn decline that started in mid-2020 – see chart below.

In the current environment, it is difficult to choose a good investment. Will macroeconomic and geopolitical tensions ease, to the benefit of growth stocks, for example? Or will the scenario deteriorate, benefiting conservative assets like commodities and, perhaps, bonds?

Picking likely winners may not be straightforward, but I find it easier to single out likely losers. Among them is the Invesco S&P 500 BuyWrite (PBP) ETF. In this article, I explain why this ETF is likely to underperform for the foreseeable future.

What is PBP?

The Invesco S&P 500 BuyWrite ETF is also known as a covered call fund. That is: an ETF that (1) invests 90% or more in broad stock index constituents and (2) holds a short position in S&P 500 call options. By selling options purchases, the fund collects the premium associated with them and, in exchange, forgoes upside potential should the index rise.

The fund’s investment in the constituents of the S&P 500 is straightforward. Currently, PBP allocates 7.3% of its assets to Apple (AAPL), 6.0% to Microsoft (MSFT), etc. The option write part is a bit more complex. The methodology is explained by the CBOE:

The issued SPX call will be approximately one month to expiration, with a strike price just above the prevailing index level (i.e. slightly out of the money). The SPX call is held until expiration and cash settlement, at which point a new one-month, near-the-money call is written.

Why PBP is likely to disappoint

Why would an investor want to buy shares of PBP? The most obvious answer, to me, is income. Since the fund sells calls every month, it raises cash via an option premium which it can then use to pay investors.

However, PBP has always been a low-yielding ETF, perhaps due to the management company’s decision to be conservative on distributions. In fact, over the past three years, PBP has returned less than a regular S&P 500 ETF and significantly less than a high-quality dividend-paying (QDIV) ETF – see chart below.

The second possible reason is partial downside protection. Because PBP sells call options, it can use the premium earned to offset some of the capital losses, if the stock market is weak.

However, keep in mind that PBP does not actively protect its assets against market downturns. Since it holds a long position in the underlying stocks of the S&P 500, the ETF fully participates in any potential decline in the stock index.

The drawdown chart below is telling. Notice how the PBP fell almost as much as the S&P 500 during the bear markets of 2008-2009 and 2020; and the near-bear of late 2018.

What PBP certainly doesn’t offer is more bullish exposure than the S&P 500 already does. Due to the short buy position that caps gains, a possible surge in stocks (especially if it happens fast enough) is unlikely to translate entirely into capital appreciation for PBP.

This is, for example, what happened after the COVID-19 bear trough. Notice below how PBP fully participated in the sale; but then it failed to keep up with the S&P 500 during the rally.

Between the devil and the deep sea

The scenarios presented above help explain why PBP is stuck in a game of “heads you lose, tails you don’t win”. A stock market crash will likely also wreck PBP, while a rally should disproportionately benefit a regular S&P 500 ETF.

The only time PBP can outperform and please investors is if the stock moves broadly sideways going forward: not too low to hurt PBP’s underlying stock portfolio, not too high that gains are capped by the ETF’s short buy position.

Looking to bet on the stock market by simply dragging your feet from here? Of course, maybe PBP is for you. But otherwise, I think this fund falls under the “likely loser” column. I wouldn’t own PBP in most market environments, let alone in the current environment.