- Cboe Vest is building the second generation of option-based index strategies. Such strategies incorporate novel uses of options seeking to achieve targeted portfolio return features such as risk mitigation, growth or income. Similar to the evolution from market-capitalization-weighted traditional beta strategies to factor tilt second-generation strategies (colloquially known as “smart beta”), Options 2.0 strategies are an evolution from the first-generation of simple but fully covered-call and put writing options strategies.
- Cboe Vest S&P 500® Dividend Aristocrats Target Income ETF (Ticker: KNG) is the first index-based ETF to combine the dividend growth factor, a recognized smart beta strategy, with a second-generation dynamic and partial covered-call options strategy.
- KNG, which seeks to produce income with growth, is comprised of an equally weighted portfolio of well-known “Aristocrats,” S&P 500 stocks with a history of 25 years of consecutive dividend growth. A monthly 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.
- The fund gives investors access to a strategy targeting annualized income of 3.0% over the annual dividend yield of S&P 500 Index, with proportional price returns, in a single ticker.
Cboe Vest Financial LLC (“Cboe Vest”), a majority- owned asset management subsidiary of Cboe Global Markets, Inc., has launched the Cboe Vest S&P 500® Dividend Aristocrats Target Income ETF (KNG), its first ETF.
KNG is index-based and seeks to track the Cboe S&P 500 Dividend Aristocrats Target Income Index Monthly Series (Symbol: SPATI), an index designed to track the performance of a partial overwriting strategy applied to the stock holdings of the well- known S&P 500 Dividend Aristocrats Index.
KNG seeks to solve the income dilemma brought on by low bond yields and concerns over fixed-income securities as a source of regular income, given their price sensitivity to rising interest rates. KNG targets portfolio yield, pursuing a strategy that seeks to convert a portion of the potential upside performance of dividend growers into current income. The strategy seeks to provide annualized income from stock dividends and option premiums of approximately 3% over the annual dividend yield of the S&P 500 Index and generate price returns that are proportional to the price appreciation of the S&P 500 Index, before fees and expenses.
Karan Sood, CEO of Cboe Vest, said: “ETFs have come a long way since the launch of market-cap-weighted equity strategies in the 1990’s. 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.”
Strategy highlights:
- The investment strategy for KNG involves purchasing stocks in the S&P 500 Dividend Aristocrats Index and “writing,” or selling, “covered” call options on a portion of the holdings of each stock each month.
- The criterion of consistent dividend growth results in a selection of “Dividend Aristocrats” stocks that are high quality—companies with 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.
The capital appreciation potential from holding dividend growth stocks supports the growth component of the strategy, while the premiums collected from sale of the options, in addition to the dividend payments, support the target income goal.
“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,” said Neamtz.
The new ETF is the first in a suite of Options 2.0 ETFs that Cboe Vest plans to launch this year. For more information on KNG or for a fund prospectus, please visit cboevestetfs.com.
