The S&P 500 is one of the most widely equity benchmarks in the world and, in the exchange traded funds universe, S&P 500 funds are some of the biggest names. However, a traditional S&P 500 fund is not an income investors best friend as the trailing 12-month dividend yield on the benchmark U.S. equity index is just 2.17 percent.
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Some ETFs look to boost the S&P 500's income-generating potential by employing options selling or writing strategies, including the new WisdomTree CBOE S&P 500 PutWrite Strategy Fund (NYSE: PUTW).
The WisdomTree CBOE S&P 500 PutWrite Strategy Fund, which debuted last week, is designed to receive a premium from the option buyer by selling a sequence of one-month, at-the-money, S&P 500 Index puts (SPX puts). If, however, the value of the S&P 500 Index falls below the SPX Puts strike price, the option finishes in-the-money and the Fund pays the buyer the difference between the strike price and the value of the S&P 500 Index, according to WisdomTree.
PUTW has some notable advantages. For example, its underlying index has captured 97 percent of the S&P 500's returns since the index launched, but just 77 percent of the S&P 500's volatility while sporting a superior Sharpe Ratio than the traditional S&P 500, according to WisdomTree data.
PUTW does not own the S&P 500 stocks, so when the traditional versions of that index rise, PUTW does not participate in that upside. However, the income for sold puts works in investors when markets decline. The options sold within PUTW are European style, meaning they can only be exercised on a monthly basis. PUTW's options are sold at the money.
PUTW invests in one- and three-month Treasury Bills and sells or writes S&P 500 Index put options. The number of put options sold is chosen to ensure full collateralization, meaning the total value of the Treasury account must be equal to the maximum possible loss from the final settlement of the put options at expiration, said WisdomTree in a note.
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PUTW charges 0.38 percent a year, or $38 per $10,000 invested. New York-based WisdomTree Investments Inc. (WETF) is the fifth-largest U.S. ETF issuer.
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