BlackRock debuts equity “BuyWrite” ETFs with double launch

Mar 19th, 2024 | By | Category: Alternatives / Multi-Asset

BlackRock has unveiled a suite of equity “BuyWrite” ETFs in the US with the launch of two funds delivering systematic covered call strategies on US large and small-cap stocks.

Rachel Aguirre, Head of US iShares Product at BlackRock

Rachel Aguirre, US Head of iShares Product at BlackRock.

The iShares S&P 500 BuyWrite ETF (IVVW US) and iShares Russell 2000 BuyWrite ETF (IWMW US) have been listed on Cboe BZX Exchange with expense ratios of 0.25% and 0.39%, respectively.

A covered call is an options strategy whereby an investor holds a long position in an asset and sells or “writes” call options on that same asset in an attempt to generate more income (the additional income from the option’s premium) than the asset would otherwise provide on its own from dividends or other distributions.

Historically, during bear markets, range-bound markets, and modest bull markets, covered call strategies have generally outperformed their underlying securities. However, during strong bull markets, when the underlying securities may frequently rise through their strike prices, covered call strategies historically have tended to lag.

While covered call strategies do limit upside participation, they can generate steady income during turbulent periods and diversify an investor’s sources of yield away from equities and bonds which historically have struggled during rising rate environments.

Rachel Aguirre, Head of US iShares Product at BlackRock, commented: “Income remains top of mind as investors move out of cash and prepare for a shift in monetary policy. These equity BuyWrite ETFs simplify access to a well-known options strategy for investors seeking to capture enhanced income opportunities in the US equity market.”

In terms of the new ETFs’ strategy, IVVW and IWMW are linked to the Cboe S&P 500 Enhanced 1% OTM BuyWrite Index and Cboe FTSE Russell IWM 2% OTM BuyWrite Index, respectively.

The Cboe S&P 500 Enhanced 1% OTM BuyWrite Index combines a long position in the S&P 500, executed through investing in the iShares Core S&P 500 ETF (IVV US), with the writing of one-month call options on the S&P 500 equivalent to 100% of the portfolio’s value. The strategy involves rolling the call options each month, with newly written options placed out-of-the-money at strike prices set to 101% of the S&P 500’s value on the day before the current option’s expiration.

Similarly, the Cboe FTSE Russell IWM 2% OTM BuyWrite Index adopts a comparable strategy, combining a long position in the Russell 2000, facilitated by investing in the iShares Russell 2000 ETF (IWM US), with written one-month call options on the Russell 2000 totaling 100% of the portfolio’s value. These call options are also rolled monthly, with newly written options positioned out-of-the-money at strike prices corresponding to 102% of the Russell 2000’s value on the day preceding the current option’s expiration.

Investors in IVVW and IWMW can expect monthly distributions from the written option premiums as well as quarterly distributions from dividends paid by the underlying equities within the S&P 500 and Russell 2000.

The two new ETFs have been priced significantly cheaper than their main existing rivals in the BuyWrite space, namely the $2.8 billion Global X S&P 500 Covered Call ETF (XYLD US) and $1.4bn Global X Russell 2000 Covered Call ETF (RYLD US). XYLD and RYLD each come with an expense ratio of 0.60% and essentially deliver the same strategies as BlackRock’s offering except their one-month call options are written at-the-money each month.

BlackRock also offers three fixed income BuyWrite ETFs that deliver systematic covered call strategies on long-term US Treasuries, as well as investment-grade and high yield corporate bonds. Collectively, the suite houses $1.1bn in assets and has expense ratios ranging from 0.34% to 0.69%.

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