The rise of options-based strategies in the last few years leaves investors with several choices when seeking income. The Parametric Equity Premium Income ETF (PAPI ) offers the dual benefit of active management alongside reliable equity income across market environments. Understanding how the underlying options strategy works allows investors to optimize the use of funds like PAPI within their portfolios.
PAPI seeks consistent monthly income as well as capital appreciation. The strategy does so by investing in an actively managed portfolio of dividend-paying equities chosen from the Russell 3000. It uses top-down, systematic analysis to select quality companies.
Companies included demonstrate 12 months of high current income and reduced risk within their sectors. The quality equity portfolio is also diversified across sectors, with sectors equally weighted.
See also: Invest in Equities While Mitigating Volatility With PHEQ
The Benefits of a Systematic Options Strategy
Parametric Portfolio Associates LLC, the sub-advisers of the fund, bring a disciplined approach to the fund’s options investing strategy. The fund uses a systematic approach to writing short-dated, laddered, out-of-the-money calls on the S&P 500 Index or the SPDR S&P 500 ETF Trust (SPY ).
A covered call option entails selling the right (but not obligation) to buy an underlying stock at an agreed-upon strike price by a specific date. Call writers earn a premium for selling the covered call, generating differentiated income potential.
The options PAPI uses generally have an expiry of two weeks. This differs from many options-based equity strategies on the market with options that roll daily or weekly. Frequent options rolling and covered call writing can lead to increased costs that may be passed on to investors. A systematic option writing approach introduces a level of predictability while potentially reducing costs.
The laddered calls generate premiums as well as allow for more upside appreciation potential compared to a single call option position. Because the options are laddered, in a rising market environment, should a covered call position be called away, other positions remain to participate.
PAPI generated a distribution yield of 7.89% as of 4/30/2024. Distribution annualizes the most recent distribution and divides it by the fund’s most recent NAV. It’s a forward-looking indicator of what investors could potentially earn in the next year if distributions remained the same.
PAPI carries an expense ratio of 0.29%, making it an affordable entry into the equity income space.
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