Motivated in part by the soaring interest rates of 2022 that plagued fixed income investments, income-hungry investors have increasingly flocked to options-based strategies, including ETFs.
That move makes sense because options income ETFs deliver uncorrelated income. That means those funds, broadly speaking, aren’t sensitive to Federal Reserve policy. The bulk of the legacy ETFs, and some newer ones, in this category are covered call funds. That means the income is sourced by selling call options on an index or the fund’s underlying assets.
The Neuberger Berman Option Strategy ETF (NBOS ) does things differently. NBOS, which converted to the ETF wrapper in January 2024, is a putwrite fund. That means it sells puts, not calls. Investors new to options income ETFs may think there’s not much of a difference, but NBOS tells a much different story. For the 12 months ending October 20, the ETF gained 3.54%. Over that same period, the largest legacy covered call ETF dropped 4.36%.
NBOS Boasts Advantages
NBOS, which is higher by 8.40% YTD, offers other perks. And they don’t require sacrificing income, as highlighted by the ETF’s trailing 12-month distribution rate of 7.40% as of September 30. For example, there are risks associated with call writing that many investors overlook. And that’s because they’re laser-focused on income.
“While some individual covered call positions may have positive outcomes, a series of negative impacts from covered call writing can be very detrimental to a long-term investment portfolio. [It may be tempting to add covered call writing to a diversified portfolio. But over] the long term, investors have not been adequately compensated for limiting appreciation potential,” according to CAIA.
Another potential perk offered by putwrite strategies such as NBOS is the possibility of greater upside capture — something NBOS has delivered this year — relative to covered call ETFs. Said another way, selling puts doesn’t require giving up future upside. But that is required when selling calls. Plus, NBOS can deliver downside protection on par with or in excess of covered call ETFs. That may surprise some investors because that protection is often a selling point of covered call funds.
NBOS offers another benefit, one tied to behavioral finance. Due to the fact that many market participants are more fearful of losing money than they are happy when they turn profitable trades, puts are usually more expensive than calls. That means NBOS can generate impressive levels of income. That’s because it’s selling higher premium options than an equivalent covered call fund.
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