PBP Invesco S&P 500 BuyWrite ETF

2013 is turning into a year of innovation for the ETF industry. A number of new funds have launched this year that offer up innovative strategies in exchange-traded form.

Just in the past few weeks we have seen the first Singapore Dollar ETF (FXSG) and a Forensic Accounting Fund (FLAG) as well. Beyond that, there have been some interesting events in the income market, largely thanks to new strategies with options (read 3 Excellent ETFs for Income Investors).

This trend could be continuing as we head into March with ALPS’ announcement of a new Put Write Index Fund. This new ETF, the US Equity High Volatility Put Write Index Fund (HVPW) continues this recent options-focused trend, and could offer up investors a new choice to achieve income.

HVPW in Focus

The ETF looks to track the NYSE Arca U.S. Equity High Volatility Put Write Index. This benchmark intends to reflect a performance of a portfolio of exchange-traded put options on a selection of the largest capitalized stocks that also have the highest volatility.

In essence, the fund looks to sell put options, selling 60 day listed put options every two months on 20 different stocks. This process seeks to generate income based off of the premiums generated from the sold options, suggesting it won’t be much of a destination for capital appreciation (see 3 Actively Managed Bond ETFs for Stability and Income).

In terms of payouts, the ETF intends to, at the end of every 60-day period, pay out an amount of cash equal to 1.5% of the fund’s net assets. This looks to come out of the fund’s investment income and/or short-term capital gains.

Investors should note, however, that if the investment income in a given 60 day period isn’t sufficient to support a 1.5% payout, the distribution will be reduced by the amount of the shortfall. Additionally, it is worth pointing out that it is possible that some distributions may count as a ‘return of capital’, so there could be some taxation issues.

This exposure isn’t cheap either, as the fund looks to charge investors 95 basis points a year in fees. This is quite pricey when compared to other high yield options out in the market, although it could be a higher volatility product as well.

How Does It Fit In A Portfolio?

This ETF is built for investors who are seeking a solid and consistent payout that is relatively uncorrelated to broad market returns. Additionally, the fund could be an interesting choice for those who recognize the benefits of options, but are not yet ready to implement a vast put selling strategy on their own (read Two Unconventional Sources of ETF Yield).

This is especially true given the large amount of options that will be sold in this ETF on a regular basis. With 120 put options going out every year, this kind of strategy may be somewhat difficult for regular investors to employ, so an ETF could be an excellent and cost efficient way to accomplish the technique on a large scale.

This ETF probably won’t be appropriate for those seeking huge returns in a short period of time though, as the selling of the options will prevent big gains. Additionally, the fee of nearly one full percentage point could make this a poor choice for those seeking a low cost choice in the ETF world.

Can It Succeed?

The ETF could succeed if it can deliver at or near its promise to pay out nearly 1.5% every two months. This would represent a distribution of nearly 9% annually, and obviously make it a great yield destination for a variety of investors.

The somewhat high cost of the product could be prohibitive to the fund’s ability to attract assets though, at least initially. Furthermore, the low asset level and the put strategy could reduce liquidity and make this fund have high bid ask spreads, which could increase the total cost of the ETF (read 11 Great Dividend ETFs).

Still, it is important to remember that the option-based ETF world is pretty small and there are only a handful of other products out there in this segment. This includes broad option ETFs like the PowerShares S&P 500 BuyWrite ETF (PBP) and the relatively new Gold Shares Covered Call ETN (GLDI).

Beyond those though, the option-focused ETF space is pretty small suggesting that this could be a new avenue of growth for the ETF world. If this is the case, HVPW could be on the cutting edge and an interesting new choice for those seeking a high rate of income in today’s market environment. 

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