US-based WisdomTree has launched a new exchange trade fund tracking the PutWrite index, a reference that is often used by investors as a solution to potentially increase the yield and lower the volatility of equity returns over various market cycles.

The CBOE S&P 500 PutWrite Index (PUT) is used as a benchmark index to measure the performance of a hypothetical portfolio selling S&P 500 index put options against collateralized cash reserves held in a money market account. The CBOE S&P 500 PutWrite Strategy Fund (NYSE Arca: PUTW) is launched on NYSE Arca. 

Luciano Siracusano, Chief Investment Strategist, WisdomTree.

Historically, the CBOE S&P 500 PutWrite Index (PUT) has had similar returns to the S&P 500 Index with less risk, so blending the two indices could offer attractive risk-adjusted returns: PUT provided over 97% of the return of the S&P 500, but had only two-thirds the standard deviation of the S&P 500. Blending incremental amounts of PUT with the S&P 500 consistently lowered the risk while maintaining over 97% or more of the returns of the S&P 500.

Luciano Siracusano, WisdomTree Chief Investment Strategist, commented: “PutWrite has been used by investors for decades as a solution to potentially increase the yield and lower the volatility of equity returns over various market cycles. We’ve teamed up with the Chicago Board Options Exchange (CBOE), a leader in options investing, to provide access to an index developed with a live track record dating to 2007 that has shown lower volatility over time, relative to the S&P 500.

“Given the recent volatility in the market, we believe PUTW can be used to potentially dampen equity volatility and serve as an alternative way to generate total return in the current low-yield environment.”

The fund’s strategy of selling cash-secured Puts may serve to enhance the return of a portfolio with a long S&P 500 Index exposure if the investor believes the market will move sideways or trend upwards. The return on an investment in the CBOE S&P 500 PutWrite Strategy Fund in this instance is equal to the premiums obtained from selling the put options, plus the yield on collateral. If, however, the value of the S&P 500 Index falls below the Put’s strike price, the option finishes in-the-money and the fund pays the buyer the difference between the strike price and the value of the S&P 500 Index. In this scenario an investor with a long S&P 500 exposure who engages in a put-writing strategy would be exposed to a decrease in value of their S&P 500 portfolio, as well as their obligation to the buyer of the option.

The fund invests in one- and three-month Treasury Bills as collateral. The number of put options sold is chosen to ensure full collateralization, meaning the total value of the Treasury account must be equal to the maximum possible loss from the final settlement of the put options at expiration. As such, the fund is not exposed to the effects of leverage on its returns.

The fund rolls options on a monthly basis – instead of quarterly or longer – to capture higher gross premiums over time. The fund uses European-style options so the buyer may only exercise the option at expiration. Options are written at-the-money in an effort to enhance available premiums per option issued.

Investors should note that premiums received from option writing are considered as capital gains under US tax laws. Furthermore, when combined with the option’s value at the expiration date, the total profit or loss from the trade will be characterized as 60% long-term and 40% short-term capital gain or loss when the fund distributes to shareholders on an annual basis. As such, the fund may provide an attractive tax scenario to investors.

The CBOE S&P 500 PutWrite Strategy Fund has a net expense ratio of 0.38%.