The prospectus of a newly launched fund discusses its strategy to generate returns of up to 5% per month. The fund is so new there are very few actual results to determine the strategy’s effectiveness. Option strategy ETFs have become a very hot category, and I plan to dig through the dozens of funds to see which ones work and which ones not so much.

Let’s start with this 5% per month ETF…

The Defiance R2000 Enhanced Options Income ETF (IWMY) started trading on November 1. The Fund has paid two monthly dividends, and the website shows a distribution rate of 57.22%. Here is the fund description from the website:

IWMY aims to achieve consistent monthly yield distributions for investors coupled with equity market exposure to the Russell 2000. IWMY is an actively managed exchange-traded fund (“ETF”) that seeks enhanced income, constructed of treasuries and Russell 2000 index options. The strategy’s objective is to generate outsized monthly distributions by selling option premium daily. The Fund uses daily options to realize rapid time decay by selling in the money puts.

Investment Objective

The Fund’s primary investment objective is to seek current income. The Fund’s secondary investment objective is to seek exposure to the performance of the Russell 2000 Index (the “Index”) subject to a limit on potential investment gains.

The prospectus states the Fund will sell in-the-money puts with near-term expirations and exercise prices 0% to 5% in the money. To achieve its return goals, the fund attempts to sell daily options with a minimum income of 0.25%. One-quarter of a percent per day times 20 trading days in a month gives the targeted 5% monthly returns.

The UWNY assets are held as short-term U.S. Treasury securities. Put options are traded on the Russell 2000 stock index, which is the small-cap benchmark index. IWM is the stock symbol for the iShares Russell 2000 ETF (IWM), but it appears the Fund is trading index options and not options on the ETF.

The theory behind selling one-day options is that the underlying index will not change value very much, and the time premium of the options will go to zero, becoming income for the Fund. If the index goes up for the day, the max gain is the amount the sold puts are in the money. If the index falls, the daily trade will lose money if the index declines more than the amount received for selling the puts.

After two months of trading, the current IWMY share price of $19.26 is close to the November 1 opening price of $20.35. Two monthly dividends totaling $2.25 have been paid, giving a total return of 5.7% since the IPO.

I will be closely monitoring IWMY, and if you are interested in what I find and information on similar ETFs, click here to submit your email to the interest list.