5 Buy-Write ETFs to Consider Amid Market Turbulence

Sweta Killa
·5-min read

After five months of a strong rally, Wall Street is caught in sluggish trading, spurred by a myriad of woes. The combination of lofty valuation, lack of an additional fiscal stimulus package, rising U.S.-China tensions, election uncertainty and allegations of money laundering against big banks have weighed on investors’ sentiment.

Additionally, resurgence in COVID-19 cases in the United States and Europe has sparked concerns over global economic recovery and lockdown measures. Most parts of Europe including Spain, Denmark and Greece have already re-imposed restriction measures and more are likely in the days ahead.

The volatility is expected to continue in the weeks ahead. This is especially true as the CBOE Volatility Index (VIX) is hovering around 26.6, well above the last year’s level of 14.91 at this point of time and the 15.8 average seen over the last five years. This suggests that market worries have started to set in. This fear gauge tends to outperform when markets are declining or fear-levels pertaining to the future are high. According to DataTrek data going 30 years back, the volatility index can take months, or even years, to return to the average levels after a crisis (read: A Biden Presidency in the Making? ETF Strategies to Follow).

However, the optimism surrounding a COVID-19 vaccine and continued support from the Federal Reserve would offer upside to the stocks.

Against such a backdrop, investments that provide capital appreciation opportunities with minimum downside risks are in demand. A gainful option for now could be the “Buy-Write” strategy.

Buy-Write Strategy in Focus

Buy-write is an option strategy that involves buying a stock or a basket of stocks and then selling or writing call options on those assets. With this process, the portfolio aims to generate additional monthly income from the call option (premiums collected). If the product stays flat or declines slightly, investors keep the premium and their stock. However, if prices rise, investors only receive the premium and the stocks are sold at the price that was agreed upon on the covered call. As such, the strategy outperforms in neutral to bear markets and underperforms in bull markets over the short term (see: all the Large Cap ETFs here).

Given the market uncertainty, investors seeking to make a play on the stocks using this strategy could consider the following ETFs:

Global X Nasdaq 100 Covered Call ETF QYLD

This ETF follows a “covered call” or buy-write strategy, in which the fund buys the stocks on the Nasdaq 100 Index and “writes” or “sells” corresponding call options on the same index. It tracks the CBOE Nasdaq-100 BuyWrite V2 Index. The product has $1.3 billion in AUM and an expense ratio of 0.60%. It trades in average daily volume of 662,000 shares (read: Low-Beta ETFs to Consider Amid Tech-Led Market Sell-off).

6 Meridian Hedged Equity – Index Option ETF SIXH

This ETF seeks to capture the majority of the return of the U.S. stock market with less risk than other equity investments. The portfolio comprises large-cap stocks with call options sold against the SPDR S&P 500 ETF in an effort to decrease volatility and increase current income. SIXH has attracted $188.6 million in its asset base since its debut in May and trades in an average daily volume of 3,000 shares. It charges 81 bps in annual fees.

Invesco S&P 500 BuyWrite ETF PBP

This fund tracks the CBOE S&P 500 BuyWrite Index, which measures the performance of a hypothetical buy-write strategy on the S&P 500 index. This strategy consists of holding a long position indexed to the S&P 500 Index and selling a succession of covered call options, each with an exercise price at or above the prevailing price level of the S&P 500 Index. The fund has amassed $167.6 million in AUM and trades in an average daily volume of 44,000 shares a day. The product charges 49 bps in annual fees.

Aptus Collared Income Opportunity ETF ACIO

This ETF seeks current income and capital appreciation. It is an actively managed ETF seeking growth and income using covered calls on individual equities. The strategy invests in 50 large-cap stocks and pursues additional income by selling coverall calls on those stocks. ACIO has an added goal of minimizing downside using long-put options on a broad-based market index. The product has AUM of $137.9 million and trades in average daily volume of 23,000 shares. It charges 79 bps in fees and expenses (read: 5 High-Yield Dividend ETFs & Stocks to Buy Now).

Overlay Shares Large Cap Equity ETF OVL

This is an actively managed ETF and seeks to outperform the S&P 500 TR Index through a combination of capital appreciation and income generation. It provides diversified, broad-market U.S. large-cap equity exposure and seeks excess return generated through option premium collection. With AUM of $107.2 million, the fund has an expense ratio of 0.75% and trades in an average daily volume of 22,000 shares.

Bottom Line

These products seem appropriate for investors seeking high levels of income and a hedged exposure to large-cap U.S. equities. It is worth noting that the funds will lag significantly during a booming period but will be an appealing pick during flat or declining market conditions, especially for investors seeking extra income in a volatile environment.

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Invesco SP 500 BuyWrite ETF (PBP): ETF Research Reports
 
Global X Nasdaq 100 Covered Call ETF (QYLD): ETF Research Reports
 
Aptus Collared Income Opportunity ETF (ACIO): ETF Research Reports
 
Overlay Shares Large Cap Equity ETF (OVL): ETF Research Reports
 
6 Meridian Hedged EquityIndex Option Strategy ETF (SIXH): ETF Research Reports
 
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