WisdomTree Launches Index-Tracking Put-Writing ETF

| About: WisdomTree CBOE (PUTW)

Put-writing strategies have been around for many years and are often used to help investors generate income in flat and rising markets. In summary, put options are contracts that give their owner (or buyer) the right to sell an underlying asset at an agreed-upon strike price, on (or sometimes "on or before") a stipulated expiration date. On the other side of the contract is the put writer (or seller), who creates the put contract and then sells it on the open market. The price paid by the put buyer is called the "premium," and if the put contract reaches its expiration date without being exercised, the put writer gets to keep 100% of this premium.

New Put Writing ETF

On February 24, WisdomTree (NASDAQ:WETF) launched an ETF that tracks the CBOE S&P 500 PutWrite Index, which itself tracks the value of a cash-secured strategy selling S&P 500 puts and investing the proceeds in one- and three-month Treasury bills. The WisdomTree CBOE S&P 500 PutWrite Strategy Fund (NYSEARCA:PUTW), as the new fund is known, employs passive management in an attempt to emulate the price and yield performance, before fees and expenses, of the Index. According to content on Barron's, and sponsored by WisdomTree, this strategy has the potential to reduce volatility while maintaining or even enhancing returns.

Since exercised put options require the writer (or the owner of the "short" contract, whoever that may be) to buy the underlying asset at the strike price, the potential losses for "naked" (unsecured) put sellers are unlimited. PUTW, by contrast, is "cash secured," in that its investments in U.S. Treasury fully collateralizes it against the maximum potential losses (note: this doesn't mean the fund won't lose money or decline in value). PUTW further mitigates its own risks by selling only "at the money" options written monthly, instead of quarterly or longer; and by using European-style options, which can only be exercised on the expiration date, as opposed to "American style" which can be exercised any time on or before the expiration date.

Key Features

WisdomTree is marketing its new ETF as having the "potential for less risk than the S&P 500," since premium income from put sales can help offset capital losses of stocks in the investors' portfolio. Other reasons investors might want to consider PUTW include:

  • Put writing has been used by sophisticated investors for decades to increase yield and lower volatility;
  • At-the-money put-writing strategies on the S&P 500 have historically performed better than the S&P 500 itself, on a risk-adjusted basis; and
  • In recent history, put-writing strategies have outperformed similar call-writing strategies.

The fund, which is structured as an exchange-traded fund, or ETF, is rebalanced every month and has a net expense ratio of 0.38%.

PUTW isn't the world's first put-writing ETF: The US Equity High Volatility Put Write ETF (NYSEARCA:HVPW) and the ALPS Enhanced Put Write Strategy ETF (NYSEARCA:PUTX) predate it, by roughly three years in the case of HVPW and about six months in the case of PUTX. The former returned an annualized +0.73% for the three years ending February 29, but was down 9.13% for the year ending that date, and off by 4.04% for the six-month period. PUTX, for its part, had six-month losses of 0.06% through February 29.

Past performance does not necessarily predict future results.
Jason Seagraves contributed to this article.

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