Collaring the Cube: Protection Options for a QQQ ETF Portfolio

Abstract

This article assesses the effectiveness of a long collar as a protective strategy. It examines the risk/return characteristics of a passive collar strategy on the Powershares QQQ trust exchange-traded fund from March 1999–2008 and finds that, over this time period, a six-month put/one-month call collar provides far superior returns to the buy-and-hold QQQ strategy with significantly less volatility. Since returns from protective strategies are not normally distributed, both Leland alpha and the Stutzer index are used to measure risk-adjusted performance. In addition, a number of implementations of a long collar strategy are considered, where for each strategy the impact of bid/ask spreads on the strategy's perfor mance is taken into account. To examine the collar's performance in different market environments, the time period is further segmented into two sub-periods, an early period that is generally favorable to the collar and a later period that is unfavorable to a collar strategy. The magnitude of the risk reduction of the collar is significant.