Rich’s fund will take this strategy, but put it into a transparent, index-based product. The ETF will receive the income from writing the option and take the downside risk if the stock closes below the barrier price. Ultimately, the ETF will seek to yield about 10% each year. The fund itself does not invest in reverse convertibles; the pattern of returns could simply resemble the returns generated in a true reverse convertible strategy.
A synthetic reverse-converts ETF isn’t for everyone; however, the investment vehicle will bring liquidity, transparency and lower prices to an area of the market that has been experiencing huge premiums.
Read the prospectus for more scenarios and examples of how the fund will work. For more stories on the newest ETFs, visit our category page.
Max Chen contributed to this article.