Income-seeking investors can utilize a newly launched alternative exchange traded fund strategy to generate yields in a slightly downward trending or sideways market.
WisdomTree Investments launched the WisdomTree CBOE S&P 500 PutWrite Strategy Fund (NYSEArca: PUTW), according to a press release. PUTW has a 0.38% expense ratio.
The PutWrite ETF will try to reflect the performance of the CBOE S&P 500 PutWrite Index, which implements a put write strategy on the S&P 500 Index. PUTW includes one- and three-month Treasury bills and sells or “writes” one-month, at-the-money, S&P 500 Index puts.
“Put writing has been used by investors for decades as a solution to potentially increase the yield and lower the volatility of equity returns over various market cycles,” Luciano Siracusano, WisdomTree Chief Investment Strategist, said in the press release.
For instance, PUTW’s underlying index has historically exhibited a lower standard deviation than the S&P 500 index. The benchmark provided 97% of the return of the S&P 500, with only 77% of the volatility, from June 2007 through the end of 2015.
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. The put write strategy would generate income through these premiums.
“Returns for PUTW will largely be driven by the premiums received from selling put options and also income earned on the collateral,” Siracusano added. “Given the recent volatility in the market, we believe PUTW can be used to potentially dampen equity volatility and serve as an alternative way to generate total return in the current low-yield environment.”
Traditionally, investors would benefit from the the put write strategy during sideways trending markets as people just pocket the premiums or income generated. Additionally, the strategy may outperform the S&P 500 when the market is declining, but it can underperform when the market is rising.
PUTW will be competing against put write ETF strategies already on the market, including the ALPS U.S, Equity High Volatility Put Write Fund (NYSEArca: HVPW) and ALPS Enhanced Put Write Strategy ETF (NYSEArca: PUTX).
Max Chen contributed to this article.