U.S. Markets open in 8 hrs 46 mins

Put-Write ETF Focuses on Income


Yield generation has been a hot topic as investors look for alternative income sources in a low-rate environment. ALPS with Rich Investment Solutions recently launched an exchange traded fund that seeks to provide income through a sophisticated options strategy.

The U.S. Equity High Volatility Put Write Index Fund (HVPW) tries to reflect the performance of the NYSE Arca U.S. Equity High Volatility Put Write Index, which tracks a portfolio of exchange-traded put options on the largest capitalized stocks that have listed options with the highest volatility. [Generating Income with the New Put-Write ETF]

HVPW has a 0.95% expense ratio. The fund was launched early March and made a roughly $0.38 distribution on April 29. Distributions will be made every two months, six times per year. If distributions remain relatively the same, the ETF could generate a 9% annual yield.

“HVPW is an income-generating fund,” Kevin Rich, president and founder of Rich Investment Solutions, the subadvisor of HVPW, said in an Investor’s Business Daily article. “The fund creates income by selling 15% out-of-the-money put options every two months on 20 underlying stocks with the highest implied volatility and market capitalization over $5 billion. Selling puts is a very efficient and popular way to generate income in the equity markets.”

Put options allow a buyer the right, but not the obligation, to sell a specific quantity of a security at a set strike price, or exercise price, on or before an agreed expiration date. The put option buyer would pay the seller a premium for this right to sell. HVPW generates income through these premiums.

HVPW holds T-bills and sells options on 20 high-volatility stocks – high volatility helps maximizes the potential income or premiums garnered through put options. Specifically, the put options sold are 15% “out of the money” – the strike price is lower than the market price – in each of the 2 month periods.

“HVPW is an income-generating ETF and complements other income-generating ETFs,” Rich said. “Investors may also use HVPW as a “defensive” allocation to their long equity positions since HVPW profits when its underlying stocks increase in value, while providing some downside protection.”

Potential investors, though, should be aware that they are giving up potential upside on equities for income generation. Additionally, stock values could drop below the option strike price over the two-month periods.

For more information on dividend funds, visit our dividend ETFs category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.