WisdomTree Investments has come out with its second put write ETF strategy to help investors better manage downside risk in the small-cap segment during an extended bull market environment.
On Thursday, WisdomTree launched the WisdomTree CBOE Russell 2000 PutWrite Strategy Fund (Cboe: RPUT), which has a 0.43% expense ratio.
The WisdomTree CBOE Russell 2000 PutWrite Strategy Fund tries to reflect the performance of the of the CBOE Russell 2000 PutWrite Index, which tracks the value of a cash-secured put option sales strategy, consisting of selling or “writing” Russell 2000 Index put options and investing the sale proceeds in one-month Treasury bills, according to a prospectus sheet.
“Put writing has been used by professional investors for decades as a solution to increase the yield and lower the volatility of equity returns over various market cycles,” Russell Rhoads, Director, Product Advancement, Global Derivatives at Cboe Global Markets, said in a note.
Specifically, 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.
Selling puts can be rewarding in stagnant stock market conditions as the trader would collect premiums, or yields, if the strike price remains below the current market price of a security. Traditionally, investors would benefit from the the put write strategy during sideways trending markets as people just pocket the premiums or income generated. The strategy may outperform when the market is declining, but it can underperform when the market is rising.
“RPUT provides investors with the opportunity to target the return of small-cap stocks ‘beta’ through a plain-vanilla options strategy,” Jeremy Schwartz, WisdomTree Director of Research, said in a note. “WisdomTree believes the premium income that RPUT receives from selling Russell 2000 Index put options can help in seeking to achieve the returns of small-cap stocks over time, while mitigating volatility associated with investing in the Russell 2000 Index alone. In addition, we’ve found that historically PUTR, the index RPUT tracks, exhibited lower risk levels than the Russell 2000.”
RPUT complements WisdomTree’s other put write ETF strategy, the WisdomTree CBOE S&P 500 PutWrite Strategy Fund (NYSEArca: PUTW). The WisdomTree PutWrite ETF tries to reflect the performance of the CBOE S&P 500 PutWrite Index, which implements a put write strategy on the S&P 500 Index.
For more information on new fund products, visit our new ETFs category.