BlackRock Introduces Covered-Call Equity ETFs Amid Surge in Option-Based Funds

BlackRock is introducing two new exchange-traded funds (ETFs) that utilize option strategies, a burgeoning area within the U.S. ETF market.

The newly introduced funds will utilize a covered-call approach on U.S. equities. Rachel Aguirre, head of U.S. iShares product at BlackRock, explained that the iShares S&P 500 BuyWrite ETF (IVVW) will focus on large-cap stocks, while the iShares Russell 2000 BuyWrite ETF (IWMW) will target small-cap equities.

Aguirre noted in a phone interview that both ETFs will be in action from 16th March.

Investors involved in these funds may receive monthly income from call-option premiums generated through their strategies and potential price increases from the equity assets they track, though limited to a certain threshold.

BlackRock Introduces Covered-Call Equity ETFs Amid Surge in Option-Based Funds
Analysts note 700% growth in option-based ETF assets, reaching $100 billion across 300 products. (Credits: Getty Images)

Aguirre clarified that there is “a trade-off” between the monthly income sought by the new ETFs through the sale of monthly call options on their underlying equity indexes and the exposure to upside movements in U.S. stock prices.

According to Aguirre’s explanation, investors can expect to capture the initial 1% of potential gains each month from the underlying fund primarily focused on the S&P 500, and the first 2% of price returns each month from the underlying ETF tracking the Russell 2000.

According to FactSet data, shares of the iShares Core S&P 500 ETF (IVV) have risen by 1.4% this month until Thursday, marking an 8.3% increase year-to-date. In contrast, shares of the iShares Russell 2000 ETF (IWM) have declined by 0.8% in March, resulting in a 0.7% gain for the year through Thursday.

Aguirre emphasized that shareholders of BlackRock’s new BuyWrite ETFs, which hold IVV and IWM, would also benefit from income derived from quarterly dividends.

JPMorgan Chase & Co. analysts highlighted in a research note on Thursday that the adoption of option-based ETFs by investors continues to expand, driving robust growth in assets under management and the diversity of products offered.

BlackRock Introduces Covered-Call Equity ETFs Amid Surge in Option-Based Funds
Call overwriting strategies to dominate options-based ETFs, offering income augmentation and equity portfolio diversification. (Credits:Unsplash)

They pointed out that assets managed by option-based ETFs listed in the U.S. have surged approximately 700% over the past three years, totaling around $100 billion across roughly 300 products.

The analysts underscored that call overwriting strategies form the largest segment of options-based ETFs, providing investors with income enhancement on an equity portfolio through the monetization of option premiums.

Call options grant holders the right, but not the obligation, to buy a security at a predetermined price by a specified date. In return for this right, the call-option buyer compensates the seller with a premium.

Aguirre reiterated that shareholders of BlackRock’s new BuyWrite ETFs, comprising IVV and IWM, would also benefit from income generated by quarterly dividends.

Sajda Parveen
Sajda Parveen
Sajda Praveen is a market expert. She has over 6 years of experience in the field and she shares her expertise with readers. You can reach out to her at [email protected]
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