Fintech company TappAlpha has launched its first ETF, an innovative fund that combines the growth potential of the S&P 500 with the income generation of a sophisticated daily covered call strategy.
The ETF is designed to offer regular income generation while still maintaining exposure to some of the stock market’s upside potential.
The TappAlpha SPY Growth & Daily Income ETF (TSPY US) has been listed on Nasdaq with an expense ratio of 0.68%.
A covered call strategy typically involves holding a long position in an asset while selling call options on that asset to generate additional income. This strategy tends to perform well in bear markets, range-bound markets, and modest bull markets, where the income from selling options can offset the limited capital gains.
However, in strong bull markets, where underlying securities may frequently rise above their strike prices, covered call strategies often underperform due to the capped upside.
TSPY gains its exposure to the S&P 500 by investing directly in the SPDR S&P 500 ETF Trust (SPY US) and then enhances income by selling daily call options on SPY. These call options typically expire the same day they are sold, with strike prices set 0-5% out-of-the-money, based on market volatility, historical data, and other key factors.
This strategy sets TSPY apart from traditional covered call ETFs, which generally write monthly, at-the-money call options. By focusing on daily expirations, TSPY aims to optimize returns by capitalizing on the rapid time decay of options, potentially boosting income while still capturing some of the S&P 500’s upside. This dynamic, daily approach allows TSPY to quickly adapt to changing market conditions, offering a more flexible income-generating strategy.
Si Katara, CEO of TappAlpha, highlighted the ETF’s strategic value in today’s economic climate.
“With TSPY, our goal is to open the door to Wall Street-caliber strategies for investors looking to combine growth and income in their portfolios,” Katara said. “Amid the uncertainty around the trajectory of interest rates, demand remains strong for added income opportunities. TSPY provides investors with an adaptive solution for income generation regardless of market and economic conditions.”
TSPY, which offers monthly distributions, is tailored to appeal to a broad spectrum of investors, including financial advisors and retail investors. It is eligible for both registered and non-registered investment accounts.
The new fund will compete with the ProShares S&P 500 High Income ETF (ISPY US) which was launched earlier this year and operates a similar S&P 500 daily covered call strategy. ISPY is priced slightly cheaper at 0.55%.
TappAlpha has another ETF in the pipeline, the TappAlpha Innovation 100 Growth & Daily Income ETF (TDAQ US), which will deliver a daily covered call strategy based on the Nasdaq 100.