A recent ETF launch serves as an indicator of a new trend related to options trading.
On Sept. 14, thematic ETF provider Defiance ETFs launched The Defiance Nasdaq-100 Enhanced Option ETF (NASDAQ:QQQY). The actively-managed ETF seeks to generate monthly income while gaining exposure to the Nasdaq 100 Index. This is achieved by selling put options in “one days to expiration” (DTE) options. While it focuses on 0 DTE options, the managers can extend out to a week.
Investors should be aware that because the fund is selling puts, the upside on the index is capped, so you won’t fully participate in the index’s gains. At least 80% of the ETF’s cash will be invested in U.S. Treasuries with six-month to two-year maturities. These Treasuries act as collateral for the options contracts.
With interest rates at their highest level in 22 years, the conditions are right for an ETF like this that is intended to generate enhanced income through its investment strategy.
Let’s examine three other ETFs that generate income through the use of options.
Global X Nasdaq 100 Covered Call ETF (QYLD)
Regarding options-based ETFs, the Global X Nasdaq 100 Covered Call ETF (NASDAQ:QYLD) is the leading U.S.-listed ETF for generating income through covered call options.
Launched in December 2013, the ETF has $7.67 billion in net assets. While it’s not in the top 100 ETFs by assets, but remains popular with investors.
In the case of QYLD, it tracks the performance of the Cboe Nasdaq-100 BuyWrite V2 Index, “a benchmark index that measures the performance of a theoretical portfolio that holds a portfolio of the stocks included in the NASDAQ-100® Index (“Reference Index”), and ‘writes’ (or sells) a succession of one-month at-the-money Reference Index covered call options,” states pg. 2 of its summary prospectus.
A covered call consists of two points – owning a stock and selling a call option on that stock. So, in the case of the QYLD, it owns all of the stocks in the Nasdaq 100. It also sells one-month call options on all 100 stocks. It sells new call options every month.
The ETF has paid monthly distributions for nine consecutive years. It currently yields 12.20%. Since its inception, it has had an annualized total return of 7.12% through Aug. 31.
The downside is that Invesco QQQ Trust (NASDAQ:QQQ) has a 10-year annualized total return of 17.35%, more than double that of QYLD.
Aptus Collared Investment Opportunity ETF (ACIO)
The Aptus Collared Investment Opportunity ETF (BATS:ACIO) is the second-largest of the trio, with $547.1 million in net assets. ACIO was launched in July 2019 and has since gathered over half a billion in assets. The company’s investment strategy is to capture upside through downside hedging.
The ETF takes the covered call option strategy used by QYLD and adds a third component to it via buying a put. This effectively applies a “collar” to the stock, as seen in this hypothetical example.
It buys 50 mega-capitalization stocks highly correlated with the S&P 500 to carry out its active management. It then sells calls and buys puts on those individual stocks, a U.S. equity ETF, or an index tracking a portfolio of U.S. stocks.
In fiscal 2023 (May 1, 2022 to April 30, 2023), it generated an annual return of 2.34%, 32 basis points less than the S&P 500 Total Return Index. That might not seem good, but with ACIO’s annual expense ratio of 0.79% to subtract from its returns and the index has none, it’s a reasonably good risk-adjusted return.
Simplify US Equity PLUS Downside Convexity ETF (SPD)
Not only is the Simplify US Equity PLUS Downside Convexity ETF (NYSEARCA:SPD) the smallest of the three ETFs with $101.0 million in net assets, it has the most esteemed name. Launched in September 2020, SPD charges just 0.28% ($28 per $10,000 invested) and has delivered an annualized rate of return of 4.98% through Aug. 31.
The ETF uses a downside convexity option overlay strategy. In other words, it purchases up to 20% of the fund’s net assets in put options on the S&P 500 or an S&P 500 Index ETF.
“The term ‘convexity’ in the Fund’s name refers to the intended non-linear nature between the Fund’s and the market returns; it does not refer to the concept of ‘bond convexity,’ which is a measure of the non-linear relationship between bond duration and changes in interest rates,” states its summary prospectus.
To summarize, SPD solely uses put options, QYLD uses call options exclusively, and ACIO uses both to generate income and protect the downside.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
