HVPW’s 9% Yield Play Getting It Done

Writing naked puts on high-vol stocks sounds risky, but it’s delivered a smooth ride to fat yields lately.

Senior ETF Specialist
Reviewed by: Paul Britt
Edited by: Paul Britt

Writing naked puts on high-vol stocks sounds risky, but it’s delivered a smooth ride to fat yields lately.

Unlike any other ETF I know of, the ALPS U.S. Equity High Volatility Put Write Index Fund (HVPW) aims to deliver specific cash flow—1.5 percent—every 60 days. That’s 9 percent in annual yield, a juicy number in today’s low-rate climate.

HVPW has been trading for about a year now, and it’s delivered the goods: Its 12-month yield per Bloomberg is 9.05 percent, delivered without the unwanted help of a dropping price.

Yield-focused ETFs include everything from high-dividend equity, junk bonds, bank loans, REITs, MLPs, preferreds stocks and multi-asset funds that dabble in all of these areas.

In contrast, HVPW does it with options. It sells puts options on about 20 stocks and collects the premiums, and it’s those premiums that get distributed to HVPW’s shareholders.

Using derivatives—especially naked puts on high-volatility stocks—sounds risky, but I’d argue that the return profile is less risky than the S&P 500.

Perhaps the biggest risk—relative to the S&P 500—is on the upside.

HVPW’s growth from a total return perspective is essentially limited to its yield. So if 2014 turns out to be anything like 2013, it will miss out on huge growth compared with what you’d get owning the S&P 500.

HVPW’s downside risk—at a maximum—equals that of an equity fund, tempered by its premiums.

In practice, its risks are more subtle. HVPW’s puts are out of the money, meaning if the stock is priced at $100, HVPW is on the hook for losses only after the price drops more than $15 within the 60-day window. And, unlike a high dividend yield equity fund, HVPW is less like to lose money if interest rates rise.

Charted out, HVPW’s performance since inception shows extremely low volatility. I’m showing it next to the SPDR S&P 500 (SPY | A-98) and to the SPDR S&P Dividend ETF (SDY | A- 71) as a high-dividend-yield reference.

HVPW gave up some gains to be sure, but also avoided the market’s dips in June 2013 and at other times.



Maybe it’s easy to forgo big gains in an up market and pay out a dividend that’s substantially less than the market’s total return for the period. Fair enough.

But I’d argue that the fund should do well in either choppy or directionless equity markets too—something that many market strategists have called for in 2014. My view is related, in part, to the low strike price of its out-of-the-money puts.

HVPW isn’t the only game in town.

Options strategies are well established in the ETF space, led by the PowerShares S&P 500 BuyWrite Portfolio (PBP | D-54) and bolstered by newer offerings like the Horizons S&P 500 Covered Call ETF (HSPX | C-81).

PBP sounds safer than HVPW at first blush. PBP writes covered calls, meaning its sells call options and also holds a basket of equities. HVPW in contrast writes naked puts, so it doesn’t hold any equity. The “High Volatility” in the fund’s name also sounds risky. HVPW earns higher premiums from selling options on riskier stocks, but reduces that risk with its lower strike price.

On paper, the funds have a similar return profile, but in practice, HVPW is far less volatile than PBP, as the chart below shows.


The likely cause of the difference isn’t structural—as in naked puts versus covered calls—but rather from the detail that PBP sets its strike price at the money, so it retains greater sensitivity to changes in equity prices.

I’d also add that the risks and rewards of equity options strategies are easier to grasp than some other high-yield plays mentioned above. MLPs come to mind.

Still, there’s some diligence needed for HVPW. Its cash flows can be tricky to understand—the fund is permitted to return capital as part of its payout.

While the legal language accompanying each cash flow can be hard to parse, the bottom line is that any return of capital would show up on a 1099. It would also show up in falling net asset value, which hasn’t happened.

The fund has a modest but viable asset base of $70 million and trades with manageable spreads and workable volume.

The bottom line is this: HVPW should appeal to those who want low volatility and high yield.

At the time this article was written, the author held no positions in the securities mentioned. Contact Paul Britt at [email protected].


Paul Britt, CFA, is a senior analyst in the ETF Analytics group at FactSet, a team that maintains and develops an industry-leading suite of ETF-related data and analytics products. Prior to joining FactSet in April 2015, he was a senior analyst at etf.com, where he performed a similar role, and worked in private placement at Pensco Trust. Paul holds a B.S. from RIT and an M.S. in financial analysis from the University of San Francisco.