2013 is turning into a year of innovation for the ETF
industry. A number of new funds have launched this year that
offer up innovative strategies in exchange-traded form.
Just in the past few weeks we have seen the first
Singapore Dollar ETF (
Forensic Accounting Fund (
as well. Beyond that, there have been some interesting events in
the income market, largely thanks to new strategies with options
3 Excellent ETFs for Income Investors
This trend could be continuing as we head into March with
ALPS' announcement of a new Put Write Index Fund. This new ETF,
US Equity High Volatility Put Write Index Fund (
continues this recent options-focused trend, and could offer up
investors a new choice to achieve income.
HVPW in Focus
ETF looks to track
the NYSE Arca U.S. Equity High Volatility Put Write Index. This
benchmark intends to reflect a performance of a portfolio of
exchange-traded put options on a selection of the largest
capitalized stocks that also have the highest volatility.
In essence, the fund looks to sell put options, selling 60 day
listed put options every two months on 20 different stocks. This
process seeks to generate income based off of the premiums
generated from the sold options, suggesting it won't be much of a
destination for capital appreciation (see
3 Actively Managed Bond ETFs for Stability and
In terms of payouts, the ETF intends to, at the end of every
60-day period, pay out an amount of cash equal to 1.5% of the
fund's net assets. This looks to come out of the fund's
investment income and/or short-term capital gains.
Investors should note, however, that if the investment income
in a given 60 day period isn't sufficient to support a 1.5%
payout, the distribution will be reduced by the amount of the
shortfall. Additionally, it is worth pointing out that it is
possible that some distributions may count as a 'return of
capital', so there could be some taxation issues.
This exposure isn't cheap either, as the fund looks to charge
investors 95 basis points a year in fees. This is quite pricey
when compared to other high yield options out in the market,
although it could be a higher volatility product as well.
How Does It Fit In A Portfolio?
This ETF is built for investors who are seeking a solid and
consistent payout that is relatively uncorrelated to broad market
returns. Additionally, the fund could be an interesting choice
for those who recognize the benefits of options, but are not yet
ready to implement a vast put selling strategy on their own (read
Two Unconventional Sources of ETF Yield
This is especially true given the large amount of options that
will be sold in this ETF on a regular basis. With 120 put options
going out every year, this kind of strategy may be somewhat
difficult for regular investors to employ, so an ETF could be an
excellent and cost efficient way to accomplish the technique on a
This ETF probably won't be appropriate for those seeking huge
returns in a short period of time though, as the selling of the
options will prevent big gains. Additionally, the fee of nearly
one full percentage point could make this a poor choice for those
seeking a low cost choice in the ETF world.
Can It Succeed?
The ETF could succeed if it can deliver at or near its promise
to pay out nearly 1.5% every two months. This would represent a
distribution of nearly 9% annually, and obviously make it a great
yield destination for a variety of investors.
The somewhat high cost of the product could be prohibitive to
the fund's ability to attract assets though, at least initially.
Furthermore, the low asset level and the put strategy could
reduce liquidity and make this fund have high bid ask spreads,
which could increase the total cost of the ETF (read
11 Great Dividend ETFs
Still, it is important to remember that the option-based ETF
world is pretty small and there are only a handful of other
products out there in this segment. This includes broad option
PowerShares S&P 500 BuyWrite ETF (
and the relatively new
Gold Shares Covered Call ETN (
Beyond those though, the option-focused ETF space is pretty
small suggesting that this could be a new avenue of growth for
the ETF world. If this is the case, HVPW could be on the cutting
edge and an interesting new choice for those seeking a high rate
of income in today's market environment.
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