The fund’s annual distributions between 2014 and 2017 ranged between 2.78% and 5.17%—the latter figure was attained last year.
HSPX has a better five-year record than the Invesco fund, posting a 9.24% annualized return versus Invesco’s 7.38% annualized return for the same period. That outperformance may not necessarily continue in a down market. The Horizons fund also has a more pleasing 0.65% expense ratio, which is 10 basis points cheaper than the Invesco fund.
The Active Approach
Investors have three active buy-write options, too, including the First Trust BuyWrite Income ETF (FTHI) that invests in equity securities of all market capitalizations listed on U.S. exchanges and then sells call options on the S&P 500 Index to collect a premium that’s distributed monthly to investors. The fund’s objective is to provide income first, and capital appreciation second. Its 12-month distribution rate as of May 31 was 4.21%.
FTHI, along with its all-cap sibling fund, the First Trust Hedged BuyWrite Income (FTLB), both have expense ratios of 0.85%, which is on the high side among funds using options strategies. Over the three years through June 29, the First Trust BuyWrite Income fund’s 8.33% annualized return has outpaced the Invesco fund’s 6.88% return, but not the Horizon fund’s 8.80% return.
The First Trust Hedged BuyWrite Income fund follows a somewhat similar strategy as the First Trust BuyWrite Income ETF, but rather than simply writing covered call options on the S&P 500, it creates a hedge by buying put options on the S&P 500 and selling covered call options on the index. Its recent 12-month distribution rate was 2.91%
The third choice is the Amplify YieldShares CWP Dividend & Option Income ETF (DIVO), which sells call options against a base portfolio of up to 25 dividend-paying stocks. This fund aims to provide gross annual income of 2% to 3% from dividend income and 2% to 4% from selling option premiums. DIVO doesn’t have a three-year record yet, but it returned 14.5% during the past year versus 12.2% for the S&P 500 (through June 29). Its expense ratio of 0.96% is the second-most expensive in the category.
Selling Puts
On the put-writing side, WisdomTree has two entries: the CBOE S&P 500 PutWrite Strategy Fund (PUTW) and the CBOE Russell 2000 PutWrite Strategy Fund (RPUT). The S&P 500 strategy receives a premium by selling a sequence of one-month, at-the-money S&P 500 puts. If the value of the S&P 500 falls below the strike price of a put on the index, the option finishes in-the-money and the fund pays the buyer the difference between the strike price and the value of the S&P 500. If the index declines, the fund will suffer losses, which will be partially offset by the amount received from the premium. The Russell 2000 fund functions the same way, the obvious difference being it deals with Russell 2000 Index put options.
Finally, a group of Credit Suisse funds, the X-Links series, consists of exchange-traded notes (which are unsecured debt securities) that provide access to various asset classes, market sectors and/or investment strategies. One example is the Credit Suisse X-Links Crude-Oil Shares Covered Call ETN (USOI), which sells calls on the United States Oil Fund (USO). Unfortunately, USO tracks the daily price moves of WTI (West Texas Intermediate crude), but not the long-term price movements. So while the price of WTI is down from more than $135 in 2008 to less than $70 today (a decline of roughly 50% over the past decade), USO is down much more—around 18% per year or more than 85% cumulatively, according to fund researcher Morningstar. If USO doesn’t do a good job tracking the long-term price moves of oil, it’s unclear how well the USOI fund will work. While USOI had a great first half this year with a nearly 10% return, investors should be wary of these funds, particularly as longer-term holdings.