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.