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Inside the New PUT-Write ETF: Can it Counter Volatility?

The U.S. bourses were on a tumultuous ride at the start of the year and were languishing in the red. Concerns over the Chinese market slowdown and the oil price rout had a brutal impact on the broader market. Though the markets are on the mend now, we share the skepticism of several other investors on the duration of this uptrend. A certain level of uncertainty is still present in the market.

Probably, this is why WisdomTree recently rolled out WisdomTree CBOE S&P 500 PutWrite Strategy Fund (PUTW), which is designed to lower the downside risks in the equity market.

The fund looks to track the CBOE S&P 500 Index which is designed to sell a sequence of one-month, at-the-money, S&P 500 Index puts and invest cash at one- and three-month Treasury Bill rates. The total value of the Treasury account should be equivalent to the highest possible loss from the final settlement of the put options at expiration.

If the value of the S&P 500 Index falls under the SPX Put’s strike price, the option finishes in-the-money and the fund pays the buyer the difference between the strike price and the value of the S&P 500 Index, as per the issuer.

The fund charges 38 bps in fees.

How Does it Fit in a Portfolio?

Put options allow the owner of the contract right, but not the obligation, to sell a definite amount of the underlying security at a pre-defined exercise price, on or before an agreed expiration date.

The issuer noted that the fund’s policy of selling cash-secured SPX Puts will help to counter the equity market volatility mirrored by the fall in the S&P 500 index to the level of the premiums received (read: 3 Alternative ETFs for a Shaky Market).

Historically, put write strategies have been successful in alleviating equity market woes to a large extent. As per WisdomTree, the CBOE S&P 500 PutWrite index has reduced the risk profile more than the S&P 500 index as the former has a standard deviation of 12.34% and beta of 0.66 compared with 16.1% of standard deviation and a beta of one possessed by the S&P 500 index.

ETF Competition

The space is not chockablock with products. Currently, there are just a couple of put-write ETFs including US Equity High Volatility Put Write Index Fund (HVPW) and ALPS Enhanced Put Write Strategy ETF (PUTX) (read:  ALPS Plans a Put Write ETF to Play Market Volatility).

PUTX is actively managed and looks to maximize returns by selling one-month put options on SPDR S&P 500 ETF (SPY) and investing the premium received from selling such options in a portfolio of investment-grade debt securities. The product has an expense ratio of 0.75% (see all long/short ETFs here).

HVPW tracks the NYSE Arca U.S. Equity High Volatility Put Write Index and sells options on SPY; the HVPW index sells 60-day put options on 20 of the largest capitalized stocks having the highest volatility and invests the premium received from selling such options in a portfolio of short-term U.S. Treasury securities. The fund charges even higher at 95 bps in fees.

With the working models being more-or-less the same, the key difference will come in the form of expense ratio – the ground on which the recently launched ETF PUTW excels.

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WISTR-CBOESP5PW (PUTW): ETF Research Reports
 
US EQ HI VPWIF (HVPW): ETF Research Reports
 
ALPS-ENH PUT WS (PUTX): ETF Research Reports
 
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