Cboe Vest launches option-enhanced S&P 500 ‘dividend aristocrats’ ETF

Mar 28th, 2018 | By | Category: Alternatives / Multi-Asset

Cboe Vest, the asset management arm of exchange operator Cboe Global Markets, has launched the Cboe Vest S&P 500 Dividend Aristocrats Target Income ETF (KNG US), combining a well-recognised dividend growth strategy with a dynamic covered-call options overlay.

Cboe Vest launches S&P 500 dividend aristocrats ETF

KNG provides exposure to a portfolio of S&P 500 stocks from firms that have increased their dividends for at least 25 consecutive years.

KNG tracks the Cboe S&P 500 Dividend Aristocrats Target Income Index which is comprised of an equally weighted portfolio of well-known so-called ‘dividend aristocrats’ – S&P 500 stocks with a history of 25 years of consecutive dividend growth.

The investment thesis behind the aristocrats strategy is that the methodology is able to produce a high level of income while avoiding low quality companies.

Consistent dividend growers are thought to be more likely to share favourable characteristics such as strong balance sheets, a history of stable cash flows and earnings growth. Consistently increasing dividends is a means for management to signal confidence in their companies’ growth prospects.

Additionally, the index includes a monthly covered-call overwrite strategy applied to a small part of the stock holdings converts a portion of the future growth of each stock into current income.

A covered call is an options strategy whereby an investor holds a long position in an asset and sells or “writes” call options on that same asset in an attempt to generate more income (the additional income from option premium) than the asset would otherwise provide on its own from dividends or other distributions.

Historically, during bear markets, range-bound markets and modest bull markets, this type of covered call strategy has generally outperformed its underlying securities. However, during strong bull markets, when the underlying securities may frequently rise through their strike prices, covered call strategies historically have tended to lag.

According to Cboe Vest, the combination of the dividend aristocrats strategy with the covered-call overlay allows the fund to pursue an annualized income target of 3.0% over the annual dividend yield of S&P 500 Index.

Karan Sood, CEO of Cboe Vest, said, “ETFs have come a long way since the launch of market-cap-weighted equity strategies in the 1990s. KNG marks the beginning of “Options 2.0″ ETF strategies that seek to incorporate inventive uses of options to achieve return features consistent with a targeted goal (in this case the level of income) in portfolios.”

The fund may appeal to yield-hungry investors who are concerned over low bond yields and the potential negative implications for bond prices as central banks pursue interest rate normalization.

“Investors have been challenged since the global financial crisis to find sources of income without introducing duration and credit risk into their portfolios. KNG, with its dividend grower stock selection and covered-call options strategy, offers a novel approach,” said Steve Neamtz, president of Cboe Vest.

“The benefit to having an investment manager run these strategies includes professional expertise, lower trading costs and lower operational risks. The KNG ETF gives investors access to quality stocks and an enhanced income strategy in a single ticker.”

The ETF, the first to be launched by Cboe Vest, has an expense ratio of 0.75%.

Investors who are primarily interested in the dividend growth strategy, but without the option strategy overlay, could cut this fee by more than half – to 0.35% – by investing in the ProShares S&P 500 Dividend Aristocrats ETF (NOBL US). This straight equity ETF was launched in October 2013 and has over $3.4 billion in assets under management.

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