On the latest episode of ETF 360, VettaFi’s Kirsten Chang interviewed Innovator’s Director of Product Management Joe Becker to discuss one of their newest product launches, the Innovator Equity Premium Income – Daily PutWrite ETF (SPUT ). This new product uses the put instead of the covered call.
Covered Calls Cover Investor Income Needs
Derivative income ETFs have seen big inflows in recent years. “As recently as 2020, there was only about $2 billion in the space,” Becker noted. “As of today, we’re sitting at $110 billion.” Covered call ETFs have been a boon for investors seeking income. These ETFs hold equities and then sell calls against those equities to generate income. Becker said investors were drawn to these products because they are a great alternative from bonds to get reliable monthly income.
Becker opined that there are some challenges in this model. “They hold equities, and then they are selling this call. There’s a sense in which these things are opposed to each other," he said. Selling a call limits the upside, according to Becker. “We thought, could we do something that could generate income and maybe generate income from the market climbing?”
The Put Proposition
Just like covered calls, SPUT holds equities and sells options for income. “The difference is instead of selling calls, SPUT sells puts,” Becker said. Puts have a higher premium than calls, creating one possible advantage. Additionally, they are less at odds with equity itself, according to Becker. “The market can climb without that put losing value.”
SPUT has about 50% allocated in large-cap S&P, with all of the appreciation that can come from that position. The puts give the fund income potential. “These combine to create a strategy that is low volatility. We expect the yield on this to be between 6%-8%,” Becker said. He also noted that the strategy should generate about half of the volatility of the S&P 500. Last month saw a 9% yield for the fund, given the enormously volatile nature of the recent market environment.
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