AdvisorShares Files for Innovative Option-Based ETF

Zacks

AdvisorShares continues to find small investment firms to work with in order to stuff more active ETFs into the pipeline and bring more novel products to market. Just to close out the year, the company revealed its latest ETF, the Pring Turner Business Cycle ETF (DBIZ), while the firm also announced, via an SEC filing, a plan for a new options-focused fund as well.

This proposed product looks to work with Recon Capital Partners in order to give them an exchange-traded way to tap into a relatively underappreciated income story. The plan is to have the fund trade under the symbol of PUTS and be called the AdvisorShares Recon Capital Alternative Income ETF.

While a great deal of information was not released in the initial filing—such as the expense ratio—we did learn a bit more about this potentially innovative fund and how it hopes to provide investors with a solid level of income in an often overlooked way (see AdvisorShares Planning New Active Income ETF).

As you might be able to tell from the ETF’s proposed symbol, the product will be focused on selling put options on equities. Generally speaking, the product looks to sell puts on equities in all ten of the major sectors, selecting about 30 puts each month for the portfolio.

Selling puts, for those unfamiliar with the options market, is generally considered a bullish strategy as you must be willing to take on the stock, albeit it a lower price and with a premium in hand. Usually, a  put will be sold at a price below the current trading level; the seller receives a premium but must buy if it hits the strike price and is exercised by the buyer.

In the fund, these put options look to be secured with cash or cash equivalents in case stock prices do fall and the strike price is hit. In terms of cash equivalents, this can consist of a variety of securities including short-term t-bills, or other highly liquid assets and even some ETFs (see ETFs vs. Mutual Funds).

Little was revealed about the selection methodology in the initial filing, although it did suggest that ‘at the money’ puts would be a big part of the fund, while large cap stocks would also be a focus of the ETF as well. While this is just speculation on my part, I think that the focus could be on stocks the company is bullish on in the short term so that they can obtain the premium without having to actually buy the shares.

ETF Competition

Not much is out there tracking the options market in the ETF world right now, as only a handful of products even use the approach at all. Of these, there is one ETN, the S&P 500 BuyWrite Index ETN (BWV) and one ETF, the S&P 500 BuyWrite Portfolio ETF (PBP).

While there have been a few filings here and there for other options based products, these are the most popular that focus in on an options technique. Currently, both cost investors 75 basis points per year but PBP is far more popular with more than $300 million in AUM.

Beyond that, AdvisorShares also has a buy-write product, the Star Global Buy-Write ETF (VEGA). This fund has under $15 million in AUM and it also looks to generate a consistent income stream to investors (Read AdvisorShares Debuts Buy-Write ETF).

However, all three members of the group utilize a covered call strategy which is more of a hedged technique than the selling puts approach that is going to be used in the PUTS ETF. Given this, it is hard to say how the proposed AdvisorShares ETF will do in terms of investor interest, but if it can manage to generate a solid yield and keep expenses reasonable, it isn’t too hard to see PBP like inflows for this potentially game-changing product.

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