ALPS Launches New Income ETF (HVPW) - ETF News And Commentary
March 01 2013 - 2:04AM
Zacks
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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