An index roll is a type of investment strategy that involves the use of a mixture of LEAPS, or long-term equity anticipation securities, and index funds. This combination creates a situation where the investor can roll over the LEAP securities as a way to generate leverage that increases returns to the level that they perform more efficiently than the index over an extended period of time. The end result is a passive approach the ultimately yields a slightly higher return than other types of indexing strategies.
In actual practice, the index roll works by rolling the LEAP into the next year, effectively securing another year’s worth of appreciation from the stocks associated with the option. Assuming that the stock is performing well and the market conditions remain favorable, the small expense involved in executing the rollover is offset fairly quickly, and the investor can look forward to small but steady gains each year that the index roll is repeated. It is possible to use this approach for as many years as desired, provided that the underlying securities associated with the LEAP option are still being traded at equitable levels.
This type of passive investing approach has a couple of benefits that make it viable to many investors. First, it is possible to commit a smaller amount of capital to the strategy and still outperform other strategies, due to the level of exposure that is gained by the rollover of the LEAP option. The index roll also offers the convenience of requiring relatively little attention once the strategy is implemented, which means the investor can spend more time on other investments that may require more constant attention, and still earn a decent return from the process. Since the investments involved must have a relatively low amount of risk in order for an index roll to be successful, the investor does not have to be concerned about sudden changes in the value of those securities. The only exception would be the occurrence of some catastrophic event that affects even the most stable of investments.
While the index roll is geared more toward rollovers involving LEAP options, the same general strategy can also be used with stock issues that have a relatively low level of risk, and that tend to incrementally increase in value from one year to the next. Since the volatility associated with the stocks is low, the investor can devote relatively little time to managing the assets. Creating an index roll situation does not prevent the investor from selling any time he or she likes, a move that may be wise if anything of lasting circumstance happens to negatively impact the value of the securities involved.
