CBOE Vest, a firm focused on what it calls “target outcome” investments, has filed for an ETF that will seek to pair two income-focused strategies—dividend investing and covered-call writing—in one package.
The CBOE Vest S&P 500 Dividend Aristocrats Target Income Index ETF will pair an investment in the stocks of the S&P 500 Dividend Aristocrats Index with a partial covered-call options strategy involving each of the component stocks.
CBOE Vest is a subsidiary of CBOE Holdings, the parent company of ETF.com.
The prospectus notes that the fund’s underlying index is designed to provide annualized income that is roughly equal to annualized income generated by the S&P 500 Index plus 3.5% in addition to matching the price return of the S&P 500 Index.
The equity portfolio is represented by the S&P 500 Dividend Aristocrats Index, an equal-weighted benchmark that includes only stocks from the S&P 500 that have consistently increased their annual dividends in each of the past 25 years. The equity index is rebalanced quarterly and reconstituted annually.
The covered-call options strategy used in conjunction with the equity exposure sells a rolling series of short call options on each of the stocks in the equity index. The document notes that the covered calls will be written on notional values that represent no more than 20% of the value of the respective underlying component stocks.
The amount of the covered calls written is determined based on the dividends generated by the component stocks and how much is needed to achieve the goal of at least 3.5% yield on top of the yield generated by the S&P 500 Index, according to the prospectus.
Covered-call strategies are known for their potential to generate income from the call premiums but also for giving up some upside in the name of protecting the portfolio from the downside. They tend to do well in bear markets.
The largest fund in the space right now is the $325 million PowerShares S&P 500 BuyWrite Portfolio (PBP), which applies a covered-call strategy to the S&P 500 Index.
The filing notes that the fund will list on the Bats exchange, which, like CBOE Vest, is a subsidiary of CBOE Holdings. However, the document did not include a ticker or expense ratio.
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