Long-term bond yields are still elevated. The Federal Reserve will likely disappoint regarding 2024 rate cuts. So, many income investors are looking to diversify beyond the basics of rate-sensitive bonds and high dividend equities. Those are among the reasons that options writing strategies are experiencing a renaissance. Options-based, income-generating ETFs represent one of the fastest-growing ETF categories. One member of that group is the WisdomTree PutWrite Strategy Fund (PUTW ).
The fund follows the Volos US Large Cap Target 2.5% PutWrite Index and has a distribution yield of 12.03%. That means it’s easy to understand why some income investors are attracted to this fund. Fortunately, the ETF’s advantages extend beyond that tantalizing yield.
Plenty of Perks With PUTW
In addition to the obvious benefit of monthly income, PUTW could be a relevant consideration at a time when some market participants are growing concerned with the lofty valuations seen with the S&P 500.
“With the S&P 500 selling at 21x forward earnings and having a robust period of outsized returns, now may be a particularly good time to consider them. Our own view is that the S&P 500 is set to have lower returns over the next 5–7 years than what it has delivered historically due to the higher valuations,” noted Alejandro Saltiel, WisdomTree’s head of indexes.
PUTW's Unique Index Methodology
The ETF’s “plumbing” is also worth acknowledging. That is to say the ETF’s underlying index employs a methodology that sets PUTW apart from rival funds.
“At any point in time, the Index holds two exchange-traded put options on the SPDR S&P 500 ETF Trust (SPY ), with roughly 50% exposure to each,” added Saltiel. “The SPY puts are selected to target a minimum premium of 2.5% as measured by the premium collected when selling the option divided by the price of SPY on the day prior to the roll date. The strike price for each position will either be (i) the ‘at-the-money’ strike price (strike price equal to the current price of the SPY) if its premium exceeds 2.5% or (ii) the strike price for the SPY put that has a premium closest to 2.5%.”
PUTW’s methodology can allow for a smoother experience than with some options-based funds. Moreover, the fund’s functionality can mitigate broad swings in monthly distributions. That’s one of the primary detracting points regarding options writing ETFs.
For more news, information, and analysis, visit the Modern Alpha Channel.
