Stock options are synonymous with gambling for most long-term investors — but even Warren Buffett has bought and sold options from time to time. For instance, in 1993, he sold short 50,000 $35 put options on Coca-Cola, giving him $7.5 million in cash up front in exchange for buying the stock for $35 — a fair price in his eyes.
While active ETFs may not be Buffett’s favorite investment vehicle, they offer investors access to unique strategies to help them navigate any market environment. And recently, options-based active ETF strategies have been pushing the envelope of creativity.
Let’s take a look at a handful of newly launched options-focused active ETFs and why you might want to consider them for your portfolio.
Invesco Launches New Options ETFs
Invesco recently launched two new active ETFs employing a similar strategy to Warren Buffett in 1993 — selling call options to collect upfront premium income. However, rather than picking an individual stock like Coca-Cola, the funds focus on two of the most popular stock indexes in the world: the QQQ and the S&P 500.
The two newly launched funds include:
- Invesco QQQ Income Advantage ETF (QQA)
- Invesco S&P 500 Equal Weight Income Advantage ETF (RSPA)
By writing covered calls, these funds generate more income than the two popular indexes pay in dividends while offsetting some downside risk. The tradeoff is that you sacrifice some upside potential by agreeing to sell shares in the index at a set price — the opposite of Warren Buffett’s agreement to buy Coca-Cola at a set price.
The funds also charge an expense ratio of 0.29%, which is higher than many long equity-only ETFs. In exchange, investors benefit from a 30-day SEC yield of 11.43% and 10.78%, respectively, which is sharply higher than the yields offered by most long index funds, including the QQQ and RSP (also operated by Invesco).
Other Options-Focused Active ETFs
Invesco’s newly launched funds aren’t the only game in town — several asset managers have launched options-focused active ETFs in recent years. Generally, these funds come in two flavors: income-focused and risk-focused option strategies.
The most popular fund is the JPMorgan Equity Premium Income ETF (JEPI), which has about $36 billion in assets under management and generates a 7.2% yield with a 0.35% expense ratio. In addition to selling call options, the fund managers actively select equity securities from the S&P 500 Index, adding a layer of active potential alpha generation.
As we mentioned earlier, the biggest drawback of using options for income is that there’s always a tradeoff. You are either agreeing to sacrifice upside or downside (or both) in exchange for current income. But, depending on your goals and market assumptions, it might be a worthwhile tradeoff.
Income-focused Options ETFs
These ETFs are sorted by their YTD total return, which ranges from 14.8% to 127%. They have AUM between $355M and $33B, and expenses run between 0.35% and 1.01%. They are currently yielding between 0.4% and 47%.
| Name | Ticker | Type | Actively Managed? | AUM | YTD Total Ret (%) | Yield | Expense |
|---|---|---|---|---|---|---|---|
| YieldMax NVDA Option Income Strategy ETF | NVDY | ETF | Yes | $355M | 126.8% | 47.3% | 1.01% |
| Aptus Collared Investment Opportunity ETF | ACIO | ETF | Yes | $682M | 22.7% | 0.4% | 0.79% |
| Amplify CWP Enhanced Dividend Income ETF | DIVO | ETF | Yes | $3.06B | 18.6% | 4.7% | 0.56% |
| Global X S&P 500 Covered Call ETF | XYLD | ETF | No | $2.86B | 15.8% | 10.7% | 0.6% |
| JPMorgan Equity Premium Income ETF | JEPI | ETF | Yes | $32.8B | 14.8% | 7.6% | 0.35% |
Buffer ETFs have also become increasingly popular. By purchasing put and call options, these funds aim to achieve performance within a defined range, limiting downside risk. The goal is usually to offset the cost of downside risk mitigation by limiting upside potential, thereby creating the “defined outcome” on day one.
There are two risks to consider with buffer ETFs. First, like writing call options, you’re sacrificing upside potential, and that can be a high opportunity cost! Second, the “defined outcome” of buffer ETFs is as of the options contract purchase. So, it’s essential to do your due diligence to know your upside limits and downside protection.
Risk-Focused Option ETFs
These ETFs are sorted by their YTD total return, which ranges from 13.5% to 19%. They have AUM between $37M and $445M, with expenses running between 0.29% and 0.53%. They are currently yielding between 0% and 1%.
| Name | Ticker | Type | Actively Managed? | AUM | YTD Total Ret (%) | Yield | Expense |
|---|---|---|---|---|---|---|---|
| iShares Large Cap Deep Buffer ETF | IVVB | ETF | Yes | $61.6M | 18.9% | 0% | 0.53% |
| JPMorgan Hedged Equity Laddered Overlay ETF | HELO | ETF | Yes | $443M | 18.4% | 0.5% | 0.5% |
| iShares Large Cap Moderate Buffer ETF | IVVM | ETF | Yes | $41.7M | 16.5% | 0% | 0.53% |
| Parametric Hedged Equity ETF | PHEQ | ETF | Yes | $37M | 13.5% | 1% | 0.29% |
The Bottom Line
Many investors associate stock options with gambling, but it’s never wise to judge a book by its cover. Stock options can be a valuable tool to help boost income or reduce risk, helping you meet your investment objectives. A growing array of active ETFs can help you achieve both outcomes without the hassle of options trading.
