Purpose Investments has launched a new actively managed ETF in Canada that seeks to provide high monthly income with some long-term capital appreciation by employing various option strategies.
The fund seeks to provide investors with a high level of monthly income.
The Purpose Enhanced Premium Yield Fund (PAYF CN) has been listed on Toronto Stock Exchange and comes with an expense ratio of 0.75%.
The ETF primarily pursues cash-covered puts within the North American equity universe. This involves writing out-of-the-money put options and simultaneously setting aside enough cash to buy the stock if it hits the option’s strike price.
Cash-covered puts are used as a stock acquisition strategy by price-sensitive investors. The put writer is bullish on the underlying stock but hopes for a temporary downturn in its price. If the put is exercised at its strike price, the investor will effectively be buying the stock at the reduced price of the strike price minus the option premium.
If the stock’s price rises without first dipping below the strike price, the investor pockets the premium and the stock is considered to be a winner that “got away”. The risk of the strategy is that the stock’s price plummets well below the strike price and does not recover.
The fund may also contain a small exposure to covered calls.
According to Purpose, the ETF offers a low correlation to traditional equity and bond markets while providing investors a tax-efficient yield generated through volatility premiums.
The fund builds on its companion, the Purpose Premium Yield Fund (PYF CN) which was launched in January 2016 and has C$140 million in assets under management. It comes with an expense ratio of 0.60%.
Both funds pursue similar strategies, except the Purpose Enhanced Premium Yield Fund aims to provide investors with a higher yield by selling puts at 3-5% out of the money, compared with the 8-10% range of Purpose Premium Yield Fund.
Som Seif, CEO of Purpose Investments, commented, “We built PAYF for investors familiar with our PYF strategy and in search of greater yield. At its core, PAYF thoughtfully writes put options and is prepared to hold the underlying equity. It allows investors to access the options market without having to develop deep expertise in derivatives. We believe there is a natural home for it in most investors’ portfolios. This is another example of us listening to our clients and making their desired strategies widely available.”