#245: An ETF with a catch that might still be worth the try
In this email:
What is ULTY?
When does it do well? When does it do poorly?
Why is it worth including in one’s portfolio?
What is ULTY?
ULTY = actively managed ETF that aims to generate weekly income by trading options on volatile stocks and ETFs = Income machine that makes money by selling options contracts to other traders who want to bet on price movements.
The fund focuses on stocks with high volatility because volatile stocks have more expensive options – which means more income when you sell them. They typically pick 15-30 different stocks at a time and hold some Treasury bonds as backup.
It's not a simple buy-and-hold fund; it's actively trading options to collect premiums.
When does it do well? When does it do poorly?
👍 ULTY thrives in:
High volatility environments: When implied volatility spikes, option premiums become more lucrative. ULTY can capitalize on market uncertainty by collecting higher premiums from covered calls.
Sideways or mildly bullish markets: The sweet spot for covered call strategies is when underlying assets move up moderately but don't blow past the strike prices.
Income-starved markets: When traditional dividend yields are low, investors flock to alternative income strategies.
👎 ULTY struggles when:
Strong bull runs occur: If underlying securities rocket past strike prices, ULTY misses out on significant upside gains while being capped at the strike price.
Volatility collapses: Low implied volatility means lower option premiums, reducing the fund's income generation potential.
Sharp market crashes: While covered calls provide some downside protection, they can't protect against major market selloffs.
Why is it worth including in one's portfolio?
The income generation potential is compelling. ULTY aims for weekly distributions, which can be attractive for income-focused investors. However, this isn't a "set it and forget it" position.
🙂 The case for including ULTY:
Portfolio diversification: It provides exposure to options-based income strategies that behave differently from traditional stocks and bonds.
Income in low-yield environments: When treasury yields disappoint and dividend stocks feel stretched, ULTY offers an alternative income source.
Professional management: Rather than trying to navigate complex options strategies yourself, you're getting active management of covered call portfolios.
🙂↕️ The risks to consider:
Capped upside: You're essentially trading unlimited upside potential for consistent income – not ideal during strong bull markets
Complexity: This isn't a simple equity ETF; the underlying strategy involves derivatives and active management
Potential for significant losses: As the fund notes, investors may suffer significant losses to their investment
💡 IMO:
ULTY makes sense as a small allocation, just not a core holding.
A starting point could be investing all dividend income into ULTY which naturally creates a separate income-focused bucket without touching your main portfolio. This way, you're essentially reinvesting dividends into a higher-yield strategy rather than back into the same dividend stocks that generated them in the first place.
Just like buying individual beaten-down stocks, timing matters with ULTY. It's most attractive when market volatility is elevated and option premiums are rich.
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