Canadian asset manager Purpose Investments is listing a new high yield ETF that is mostly made of put options. Structured as an ETF share class of an existing fund, the Purpose Premium Yield Fund (PYF/F) aims
to provide a long-term return similar to the equity markets, but with lower risk. The fund is made mostly of cash-covered put options, which are about 10 - 15% in the money. If the fund gets putted to and ends up owning a stock, the fund's portfolio managers will then write calls on the stocks owned.
Why write puts versus just holding the stock? To derisk, Purpose says, PYF has substantially less equity risk than a long only equity portfolio. The reason being that the options have less beta than long-only equities. There's also potentially less drawdowns.
The fund needs some degree of volatility in order to perform, Purpose says. It's hard to generate an attractive premium when volatility is low and returns predictable as few want to pay premiums for put options.
The fund aims for a 7% yield. According to Purpose' website the current yield is 5.2%.