Profit With This New Put-Write ETF As Markets Rise
The U.S. bourses, which ended the first half of 2015 in red and were beaten down heavily by concerns over China and Greece to start the second half, are now on the mend. Positive sentiment has built up in the market lately (read:Great ETF Picks for 2nd Half of 2015).
This is especially true given the recovery in the Chinese stocks and progress in Greece deal. Additionally, optimism over Q2 earnings as well as an improving domestic economic health will likely drive the stocks upward. However, a strong dollar, lower oil price, global growth concerns, and geopolitical tensions continue to be the major headwinds.
With looming uncertainty and the prospect of the stock market rising higher, ‘Put-Write’ strategy seems to be a gainful investing approach for those seeking higher income from the expected increase in the stock market while at the same time looking for downside protection. In order to profit from this lucrative investing corner, ALPS launched ALPS Enhanced Put Write Strategy ETF last week.
PUTX in Focus
The new ETF is actively managed and looks to maximize returns by selling one-month put options on SPDR S&P 500 ETF (SPY - ETF report) 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% (read: ALPS Plans a Put Write ETF to Play Market Volatility).
How ‘Put-Write’ Strategy Works
A put-write or selling puts is an option strategy where an investor writes a put contract for a stock or a basket of stocks; and by selling the contract to the put buyer, the investor has sold the right to sell shares at a specific price (known as strike price). Thus, the put buyer has the right to sell shares to the put seller. With this process, the investor aims to generate additional monthly income from writing the put (premiums collected).
If the stock stays flat or rises, investors keep the premium and their stock. However, if price falls, investors will only receive the premium and the stocks will have to be bought at the price that was agreed upon in the put-write option. As such, a put-write strategy is beneficial in the stagnant or rising stock market with downside "defensive" protection (read: 3 Long/Short ETFs to Wait Out Volatility).
In case of PUTX, when SPY remains flat or rises in value, the ETF will provide higher income, with premiums collected as the put option not exercised. But if SPY falls, the new fund will lose as it sold the put options, which has increased in value, leaving just the premium for investors to offset some of their losses.
ETF Competition and Bottom Line
Currently, there is only one put-write ETF – US Equity High Volatility Put Write Index Fund (HVPW - ETF report) – available in the market and that too from the same issuer ALPS. HVPW tracks the NYSE Arca U.S. Equity High Volatility Put Write Index. Unlike PUTX, which sells options on SPY, 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.
Though the fund has amassed only $59.5 million in its asset base so far and trades in a light volume of nearly 19,000, it has returned an impressive 3.1% in the year-to-date timeframe. This is much higher than the gain of 1.9% for broader market fund. Further, HVPW charges a bit higher fee of 95 bps per year from investors (see: all Long/Short ETFs here).
That being said, it will not be difficult for the new fund to see strong asset flows and garner solid investors’ interest in the current market scenario, which is calling for a rise in the stock market at least in the near term instead of a decline. Further, its low expense ratio compared to many other strategy-focused funds could provide an edge to this investing corner of the world.
Disclosure: None.
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