High-Yield, Put-Write ETF

A new put-write exchange traded fund has been misinterpreted as a “high-volatility” investment. Instead, this type of investment actually shows low overall volatility while seeking to produce robust yields.

The ALPS U.S. Equity High Volatility Put Write Index Fund (NYSEArca: HVPW), which tracks a portfolio of exchange-traded put options on the largest capitalized stocks that have listed options with the highest volatility, has the “high volatility” moniker attached to its name, but the fund showed less volatility than the S&P 500. [Put-Write ETF Focuses on Income]

Most people just assume that the ETF is more risky that it is. Investors just require more education to better understand the investment product and how it fits into a portfolio.

“HVPW is a hedging strategy,” Kevin Rich, president and founder of Rich Investment Solutions, the subadvisor of HVPW, said on a telephone interview. “The fund’s volatility is a fraction of the S&P 500, coming in at one-third to that of the broader index. The ETF is made up of high-volatility stocks, but the trade itself is low volatile.”

HVPW has a 0.95% expense ratio. The ETF also set a 1.5% yield target for every two months, with a 12-month dividend target of 9%. Additionally, Rich said that the strategy is currently outperforming and believes that HVPW is on course to generate a 15% annualized total return.

The ETF generates its income by selling 15% out-of-the-money put options every two months on stocks with the highest implied volatility. Specifically, 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. 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.

Put options allow a buyer the right, but not the obligation, to sell a specific quantity of a security at a set strike price, or exercise price, on or before an agreed expiration date. The put option buyer would pay the seller a premium for this right to sell. HVPW generates income through these premiums.