Buy-Write ETFs

Readers know that we spend quite a great deal of time talking about ETF/Index options flow in our reports on a regular basis in terms of how they translate to notable market color, so it seems fitting that today we highlight an actively managed ETF strategy that debuted last fall.

VEGA (AdvisorShares STAR Global Buy-Write ETF, Expense Ratio 2.01%) is designed to sell call options against underlying long positions in the fund in order to earn a consistent income stream from taking in the premiums from the call sales.

Not only does the portfolio manager of the fund (Partnervest Advisory Services LLC) sell calls methodically, but in times of low volatility (such as now for instance, with the VIX trading with a $14 handle), they will purchased protective put options as well to manage the overall risk in the portfolio. [New Put-Write ETF]

Currently, VEGA has about a 25% weighting to cash equivalents, with top equity long positions looking like the following (IYR 12.61%, SPY 12.58%, XLE 12.45%, DBP 12.42%, and EEM 12.37%).

Remember that one of the key tenets of the strategy is to simultaneously write, or sell call options against the equity (in this case ETF) longs in the portfolio and hold both positions.

In delving through the fund literature, the portfolio managers also aim to “harness volatility” which in their words “creates less dependence on markets for returns during market downturns. Volatility may allow investors to add to their return when options are not exercised.”