The long-awaited launch of Elon Musk’s SpaceX also spawned a slew of new ETFs, including new products aimed at generating income for investors. The Kurv SpaceX Enhanced Income ETF (XSHP) began trading last Wednesday, making it the first SpaceX-themed covered call ETF, according to Todd Rosenbluth, head of research at VettaFi. “In 20 years of covering the ETF market, I have never seen an initial public offering have as much impact as SpaceX,” Rosenbluth said. “While we have seen several companies launch spot Bitcoin ETFs at the same time, the introduction of the Leveraged Enhanced Income ETF for SpaceX was much faster, coming within just a week of its initial public offering.” Income from volatile stocks Kurv owns a series of single-stock income ETFs, including the Yield Premium Strategy Amazon ETF (AMZP) and the Yield Premium Strategy Tesla ETF (TSLP). Howard Chan, Kurv’s founder and CEO, said his company’s SpaceX Income Fund has long exposure to equities and uses call spreads, a variation of a covered call strategy, to generate income. A call option gives the holder the right to buy the stock by a certain date at a specified price, known as the strike price. This ETF’s call spread strategy involves selling a call to generate a premium at a specified price, while simultaneously buying another call option at a higher strike price to capture potential upside. Although the fund has been around for a while, Zhang said the strategy has worked well for SpaceX as it weathers the recent volatility crisis. As of Tuesday afternoon, the stock is on pace to end a three-day losing streak. “The first call option I sold expired and I was out of money, so I received a premium,” he said. “We’ve had three consecutive days of declines and we’ve earned some premium for income distribution.” Chan said the fund allows investors to play stocks without necessarily betting on the direction of the stock price. “We have a slightly different view of SpaceX itself,” he said. “Our outlook is for the first couple of revenues (releases) and people are actually buying it with hope.” XSHP aims to deliver monthly. The expense ratio is 0.99%. Income Generation Due Diligence Complexity and cost are among the biggest hurdles facing investors who want to enter derivative income ETFs. “Single stock option income ETFs are risky as a concept, but a stock with no prior track record makes it difficult for investors to understand the risk/return/income profile they should expect,” said Zachary Evens, Manager Research Analyst at Morningstar. Unsustainable distributions are another issue investors should be aware of when considering derivative income ETFs. This is when the fund manager distributes more than the premium it earns from options activity and takes a small bite into the fund’s net asset value. “One that returns 100% of distributions? That is likely to cause NAV erosion,” Chan said. “If it’s too good to be true, it’s too good to be true.”
