A Relatively 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 (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.
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.
"If the price of the stock falls below the strike price, the put seller will have to purchase shares from the put buyer when the option is exercised," Investopedia explains. "Therefore, a put seller usually has a neutral/positive outlook on the stock or expects a decrease in volatility that he or she can use to create a profitable position."
However, investors assume the risk that the selected stocks may close below their strike price and give up any potential upside on the underlying equities above the income the fund receives from selling the options.
"No other ETFs do this, and the closed-end and mutual funds that do are more expensive," Rich said. "We didn't invent put writing. We're just wrapping the strategy into an effective ETF vehicle."
ALPS U.S. Equity High Volatility Put Write Index Fund
Max Chen contributed to this article.