Today, Cboe Vest is rolling out its first ETF, what it terms a “second generation” approach to options-based strategies. The Cboe Vest S&P 500 Dividend Aristocrats Target Income ETF (KNG) seeks to generate annualized income that is 3% more than the S&P 500 Index’s annualized dividend yield, while also proportionally matching the index’s price return.
Cboe Vest is a subsidiary of Cboe Global Markets, the parent company of ETF.com. KNG lists on CGM. The fund comes with an expense ratio of 0.75%.
According to Karan Sood, CEO and founder of Cboe Vest, the firm’s strategies “all have a very specific outcome or portfolio return attribute that an investor might desire in their portfolio.” These can include protection, income or growth.
To accomplish its goal, KNG combines exposure to the stocks of the equal-weighted S&P 500 Dividend Aristocrats Index that have options listed on them and a covered-call strategy. The Dividend Aristocrats index covers companies from the S&P 500 that have grown their dividends consistently for the past 25-consecutive years. The strategy generally results in the selection of high-quality companies.
The options strategy consists of short call options on the stocks of the equity index, essentially a covered-call or “call overwrite” strategy. However, the covered calls are limited to a notional value that is no more than 20% of the market capitalization of each stock in the Dividend Aristocrats index, the prospectus says. In other words, the covered calls are not fully covered.
“You probably want to have a more intelligent design to how you want to sell the options to get to your [targeted] income level,” said Sood. A typical, fully covered-call strategy gives up all of an investor’s future growth for current income, he noted.
“We’re saying let’s target a certain level of income and just write the appropriate amount of options to get to that income. Basically how much you write in options is driven by the target,” he added.
Converting Growth Into Income
He describes the strategy as converting just some of the fund’s future growth into income.
Ultimately, KNG’s strategy is income-focused, and designed to achieve 3% more than the yield of the S&P 500 mainly through the dividends paid out by the equities portion of the portfolio and the premium income generated by the covered calls.
Reconstitutions occur annually, but rebalancings are on a quarterly schedule, according to the prospectus.
Cboe Vest has several more ETFs in registration that will track options-related strategies.
Contact Heather Bell at [email protected]