ProShares has launched a ETF that uses a daily covered call option to help generate high income over long periods.
The S&P 500 High Income ETF (ISPY) tracks the S&P 500 Daily Covered Call Index, which itself launched last October. The index reflects higher income generation and has lower timing risk by using daily options compared to monthly ones.
The ETF directly tracks the index and will generate high income, target the full returns of the S&P 500 over the long term, and capture the returns that traditional covered call strategies are sacrificing, according to Simeon Hyman, global investment strategist at Bethesda, Md.-based ProShares.
“I think a lot of covered call investors may have forgotten or may not have even realized they were making a trade-off,” he said.
The trade-off is having to limit the upside of the fund to the cap that was set for the month even if the price rose beyond it, he said, adding that this impacts the full potential for income. The new ETF fixes that problem, he said, while giving investors an ETF that can have versatile functions within a portfolio.
“Because you can achieve S&P returns over the long term, it goes right in the equity bucket,” Hyman said. “But then you’re also generating income, so you can also at the same time achieve income goals for spending needs and liquidity needs.”
Traditionally, covered call options occur on a monthly basis, which can be limiting, he said. Since an investor is selling the option at a specific price, they will not be able to make more than the price listed regardless of how much it may increase over the course of the month.
By offering a daily call option, investors do not have to worry about losing potential income if the price were to increase again, Hyman explained. It also allows them the opportunity to obtain S&P 500 returns over the long term, the firm said.
“If the S&P goes up the first few days of the month and it stays there, then you’re done and you have no more upside [for the rest of the month],” he said. “If you do it every day, you have a new bite of the apple every single morning and that allows you to capture the return of the S&P 500 over time.”
About a year ago, the Chicago Board Options Exchange began offering daily call options and the index launched in October. The firm moved quickly to begin offering a daily call option ETF and sees it as an innovative way to provide investors with the opportunity to obtain income.
“We have seen substantial demand for income beyond conventional sources,” said Michael Sapir, CEO of ProShares, in a statement. “We believe that ISPY will be an attractive alternative to popular covered call ETFs, where investors may sacrifice long-term return potential in order to strive for high income.”
The passive ETF has an expense ratio of 55 basis points and will be distributed directly to self-directed investors as well as financial advisors and registered investment advisors, Hyman explained.
