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AdvisorShares Debuts Buy-Write ETF (VEGA)

Eric Dutram

While a number of issuers have been curtailing their ETF lineup, AdvisorShares, the Maryland-based ETF issuer, is apparently moving full-speed ahead with its active ETFs, as evidenced by the recent series of launches by the firm including the QAM Equity Hedge ETF (QEH) and the Global Alpha & Beta ETF (RRGR) which both came out over the summer.

This trend is evidently continuing as the company announced its latest foray into the actively-managed ETF landscape is the STAR Global Buy-Write ETF (VEGA), a new fund that will be managed by Partnervest Advisory Services. The product marks the 16th ETF for AdvisorShares and it also potentially helps the company expand into the popular ‘buy-write’ segment, albeit with an active ETF which could present investors with an entirely new way to play the space.

VEGA ETF in Focus

This new fund looks to provide investors with consistent, repeatable returns across all types of market environments. This looks to be done using a ‘buy-write’ strategy, in which individual call options are written against each of the ETFs or stocks in the portfolio (read Three Low Volatility ETFs for Stormy Markets).

This technique looks to lower volatility levels—although it will probably reduce return potential—while simultaneously generating income for investors. With this approach, VEGA could be a low risk way to play the markets and a relatively easy way to implement a covered call (buy-write) technique without having to monitor options positions on your own.

In addition to reducing volatility, VEGA’s style could also offer up uncorrelated returns which could make the fund an interesting choice given the increasingly lockstep market environment that we find ourselves in at this juncture. If that wasn’t enough, the fund also (when volatility is low) will use protective puts in order to manage downside risks for investors.

Investors should also note that although the product has a relatively high cash position right now, this will shift to more ETFs as the product begins to implement its option-focused strategy. With that being said, the current top holdings include popular ETFs such as SPY, EEM, IYR, and XLE, suggesting that it will be writing options against a variety of funds and market segments (read Three Defensive ETFs for a Bear Market).

"We're excited to partner with AdvisorShares in bringing VEGA to market," said Ken Hyman, President and Chief Executive Officer of Partnervest in a press release. "If history has taught us anything, it is that a single person or entity cannot consistently predict the markets with any high degree of accuracy. We feel confident that VEGA may minimize losses on the downside and has the capability to participate in the market’s upside, providing investors with an attractive all-weather alternative strategy within a transparent, highly liquid and cost-efficient ETF wrapper."

Despite the many positives of the fund, investors should be aware of its rather high expense ratio—at least compared to passive ETFs—while the product is also likely to see relatively wide bid ask spreads as long as trading volumes and AUM are low.

In fact, net expenses come in at 2.01%, thanks to a management fee of 1.35%, 42 basis points of acquired fund fees, and 24bps of other expenses, suggesting that it could be a high cost fund when compared to more passive products in the space (read Guide to the 25 Cheapest ETF).

ETF Competition

Luckily for VEGA, the expense ratio may not be too much of a concern as the ‘buy-write’ ETF market isn’t exactly a competitive one, at least at this time. Seemingly, the only real foe in this segment is the PowerShares S&P 500 BuyWrite Portfolio (PBP).

This ETF follows the CBOE S&P 500 BuyWrite Index which is a benchmark that invests in the S&P 500 and then writes calls slightly out of the money one month out. This approach can also generate income and provide investors with some level of downside protection, although it can lose out when markets surge in a short time period (read Are Buy-Write ETFs Worth the Cost?).

However, investors should note that PBP only writes calls on the broad S&P 500 and nothing else. This is in stark contrast to the just launched VEGA which goes across market segments and sectors to provide a potentially more robust buy-write strategy.

While this can possibly provide investors with a more complete look at how the buy-write strategy is doing, VEGA will cost more in terms of fees by a pretty wide margin. This suggests that if cost is a concern PBP is probably going to be a better choice, but if investors are looking for a more holistic approach to buy-write investing the newly minted VEGA could be the way to go.

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