Introducing the WisdomTree CBOE Russell 2000 PutWrite Strategy Fund

alternative
schwartzfinal
02/01/2018

The Russell 2000 Index is one of the most widely followed indexes for U.S. small-cap stock market exposure. But when volatility rises or investors’ return expectations get ratcheted down due to market valuations, investors search for ways to reduce equity volatility while maintaining exposure to their strategic asset classes.

 

We believe option-oriented investment strategies, like those in WisdomTree’s first options strategy fund, the WisdomTree CBOE S&P 500 PutWrite Strategy Fund (PUTW), can play an important role in strategic asset allocations when investors are looking for alternative ways to reduce volatility other than changing stock selection and targeting low-volatility stocks from an asset class.

 

Now investors have a small-cap option to do that in one simple investment that can complement existing small-cap holdings.

 

The WisdomTree CBOE Russell 2000 PutWrite Strategy Fund (RPUT) seeks to track the price and yield performance, before fees and expenses, of the Cboe Russell 2000 PutWrite Index (PUTR).

 

Investment Strategy

 

RPUT invests in one-month Treasury Bills  and sells or “writes” Russell 2000 Index put options. The number of put options sold is chosen to ensure full collateralization, meaning the total value of the Treasury account is expected to be equal to the maximum possible loss from the final settlement of the put options at expiration. In addition:

 

  • Options are written “at the money,” meaning the option’s strike price is identical to the price of the underlying security.
  • Options are written monthly, instead of quarterly or longer, to capture more gross premiums.

 

Potential for Less Risk than the Russell 2000

 

The premium income the Fund receives from selling puts can help mitigate the negative performance of an exposure to just the Russell 2000 Index. Historically, PUTR, the index RPUT tracks, had lower risk than the Russell 2000 over the period:1

 

  • PUTR provided 56% of the volatility of the Russell 2000.
  • PUTR had only 43% down capture versus the Russell 2000 and a beta of less than .5.
  • The last two years have been a historically low-volatility environment for the markets generally, with the two-year trailing volatility of the S&P 500 being 7.8%. The Russell 2000 and small caps generally tend to have higher volatility, at 14.21%.

o The PUTR index had a volatility level of 7.95%—much closer to volatility of the S&P 500 and significantly lower than the Russell 2000.

 

Risk and Return Statistics

Beta vs Dow Capture vs Russell 2000

Risk and Return Statistics

 

Calibrating Expectations

 

The PUTR Index has been around for only a short amount of time—approximately two years—during which the markets have been in a large, powerful move higher. The PUTR Index has a return profile that limits upside participation in powerful rallies due to the strategy of selling options and collecting the premium income only as the primary driver of return. If markets have more subdued gains going forward or volatility returns and increases the premium income reflected in the PUTR Index returns, a small-cap options strategy could become more important looking forward than it has been over the last two years.

 

To Summarize: Why Invest in RPUT?

 

  • Put writing has been used by professional investors for decades as a solution to help increase the yield and lower the volatility of equity returns over various market cycles.
  • The ability to benefit from implied volatility typically is higher than realized volatility.
  • Premium income can help mitigate the negative performance of investing in the Russell 2000 Index alone.

 

 

1Sources for bullets: WisdomTree, CBOE, Zephyr StyleADVISOR, for the period 11/30/15–12/31/17.
About the Contributor
schwartzfinal
Executive Vice President, Global Head of Research

Jeremy Schwartz has served as our Executive Vice President, Global Head of Research since November 2018 and leads WisdomTree’s investment strategy team in the construction of WisdomTree’s equity indexes, quantitative active strategies and multi-asset model portfolios. Mr. Schwartz joined WisdomTree in May 2005 as a Senior Analyst, adding to his responsibilities in February 2007 as Deputy Director of Research and thereafter, from October 2008 to October 2018, as Director of Research. Prior to joining WisdomTree, he was head research assistant for Professor Jeremy Siegel and helped with the research and writing of Stocks for the Long Run and The Future for Investors. Mr. Schwartz also is co-author of the Financial Analysts Journal paper, What Happened to the Original Stocks in the S&P 500? He received his B.S. in Economics from The Wharton School of the University of Pennsylvania and hosts the Wharton Business Radio program Behind the Markets on SiriusXM 132. Mr. Schwartz is also a member of the CFA Society of Philadelphia.