ALPS Lists High-Volatility ‘Put Write’ ETF
February 28, 2013
ALPS, the Denver-based ETF sponsor, today launched a high-volatility ETF that, through put options, looks to capture enhanced returns from rallying stocks in what amounts to a high-risk income strategy.
The U.S. Equity High Volatility Put Write Index Fund (NYSEArca: HVPW) tracks an NYSE Arca index, and comprises exchange-traded put options sold on a basket of 20 stocks chosen from some of the largest-capitalization equities that also show the highest volatility in the space, according to the fund’s prospectus. The fund costs 0.95 percent a year, or $95 for each $10,000 invested.
High-volatility equities generally see sharp declines in bear markets, but they also tend to see outsized gains when stocks are rallying. That makes the timing of this launch opportune given that the U.S. stock market has been rallying to multiyear highs as investors add to their risk exposure and bet on a recovering economy.
“In a bull market, this can be a yield play,” IndexUniverse ETF analyst Gene Koyfman said. “The idea is that if you expect markets to trend up and you sell insurance (write puts) on the most volatile stocks, you should get a healthy premium even for out-of-the-money puts.”
“The downside is that you are the insurance provider on the portfolio downside,” he added.
While low-volatility strategies have been all the rage in the past two years—as evidenced by fund launches and asset flows—there are limited opportunities for investors who want to dip into the high-volatility ETF space.
In fact, HVPW will face few challengers given the fact that two Russell high-volatility strategies, “HVOL” and “SHVY,” were shuttered last year.
To be eligible for the portfolio, companies on which options are sold must have a minimum market cap of $5 billion. The put options have a 60-day term, the filing said.
The fund looks to pay out 1.5 percent every 60 days, according to the filing, which would work out to roughly 9 percent a year, IndexUniverse ETF analyst Paul Britt noted.
The strike price of each put option—the price at which each can be exercised—included in the index must be as close as possible to 85 percent of the closing price of the option’s underlying stock price as of the beginning of each 60-day period.
ALPS is the 14th-largest U.S. ETF provider, with $5.6 billion in assets, according to data compiled by IndexUniverse.
Paul and Ugo discuss the rumors surrounding the SEC's new approach to passive ETFs and whether investors have learned any lessons from the recent moves in gold.See All