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Introducing the WisdomTree CBOE S&P 500 PutWrite Strategy Fund

by Tripp Zimmerman, Associate Director of Research on February 24, 2016

The S&P 500 Index has long been considered the ultimate representative index for the U.S. stock market. And many investors have an investment (or two) that tracks it. But when volatility rises, investors typically search for ways to reduce that volatility while maintaining—or enhancing—their returns. Now, investors have the option to do that in one simple investment that complements their existing holdings.
 
The WisdomTree CBOE S&P 500 PutWrite Strategy Fund (PUTW) seeks investment results that, before fees and expenses, generally correspond to the performance of the CBOE S&P 500 PutWrite Index (PUT).
 
Investment Strategy

PUTW invests in one- and three-month Treasury Bills and sells or “writes” S&P 500 Index put options. The number of put options sold is chosen to ensure full collateralization, meaning the total value of the Treasury account must 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” or at the current level of the S&P 500 Index
• Options are written monthly, instead of quarterly or longer, to capture more gross premium
• The Fund uses European-style options, so they can only be exercised at maturity
 
Potential for Less Risk Than the S&P 500

The premium income the Fund receives from selling puts can help mitigate the negative effects of investing in just the investment vehicles that track the S&P 500 Index. Historically PUT, the index PUTW is designed to track, had similar returns to the S&P 500 Index with less risk, so blending the two indexes could offer attractive risk-adjusted returns:
 
• PUT provided over 97% of the return of the S&P 500, but had only two-thirds the beta of the S&P 500
• Blending incremental amounts of PUT with the S&P 500 consistently lowered the risk while maintaining over 97% or more of the returns of the S&P 5001
 
Risk & Return Characteristics: S&P 500 and PUT
Risk & Return Chart S&P 500 and PUT (2)

 
Why Invest in PUTW?

• Put writing has been used by sophisticated investors for decades to help increase yield and lower the volatility of equity returns over various market cycles
• “At-the-money” put writing strategies on the S&P 500 Index have historically exhibited better risk-adjusted returns than the S&P 500 Index2
• Premium income could help mitigate the negative effects of investing in the S&P 500 Index alone
• Gross premiums from selling “at-the-money” puts on the S&P 500 Index have historically been higher than gross premiums received from selling “at-the-money” calls3
• Even though more investors may be familiar with call writing, in recent history a put writing strategy outperformed a similar call writing strategy4
 
PUTW Quick Facts
• Ticker: PUTW
• Exchange: NYSE
• Expense ratio: Net expense ratio, amount charged to shareholder: 0.38%; gross expense ratio: 0.44%*
• Structure: Open-end ETF
• Exposure: Long Treasury Bills and short S&P 500 Index put options
• Rebalancing: The portfolio is rebalanced on a monthly basis
 
 
*The Net expense ratio reflects a contractual waiver of 0.06% through December 31, 2016.
 
 
 
 
1Sources for the two bullet points: WisdomTree, CBOE, Zephyr StyleADVISOR, 6/30/07–6/30/15.
2Sources: WisdomTree, CBOE, Zephyr StyleADVISOR, 6/30/07–12/31/15.
3Sources: WisdomTree, CBOE, 6/30/07–12/31/15.
4Sources: WisdomTree, CBOE, 6/30/07–12/31/15.

Important Risks Related to this Article

There are risks associated with investing, including possible loss of principal. The Fund will invest in derivatives, including S&P 500 Index put options (“SPX Puts”). Derivative investments can be volatile, and these investments may be less liquid than other securities, and more sensitive to the effects of varied economic conditions. The value of the SPX Puts in which the Fund invests is partly based on the volatility used by market participants to price such options (i.e., implied volatility), so increases in the implied volatility of such options will cause the value of such options to increase, which will result in a corresponding increase in the liabilities of the Fund and a decrease in the Fund’s NAV. Options may be subject to volatile swings in price influenced by changes in the value of the underlying instrument. The potential return of the Fund is limited to the amount of option premiums it receives; however, the Fund can potentially lose up to the entire strike price of each option it sells. Due to the investment strategy of the Fund, it may make higher capital gain distributions than other ETFs. Please read the Fund’s prospectus for specific details regarding the Fund’s risk profile.  

WisdomTree Funds are distributed by Foreside Fund Services, LLC. Foreside Fund Services, LLC, is not affiliated with CBOE and S&P.   

The CBOE S&P 500PutWrite Index is a product of S&P Dow Jones Indices LLC or its affiliates (“SPDJI”) and [CBOE], and has been licensed for use by WisdomTree. Standard & Poor’s® and S&P® are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademarks Holdings LLC (“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by WisdomTree. CBOE® is a trademark of the Chicago Board Options Exchange, Incorporated, and has been licensed for use by SPDJI and WisdomTree. The WisdomTree CBOE S&P 500 PutWrite Strategy Fund is not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates or the Chicago Board Options Exchange, Incorporated, and none of such parties make any representation regarding the advisability of investing in such product(s), nor do they have any liability for any errors, omissions or interruptions of the CBOE S&P 500 PutWrite Index.

 

 

 

 

 

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