The long-awaited launch of Elon Musk ‘s SpaceX also spawned a host of new ETFs in its wake, including a new offering that aims to generate income for investors. The Kurv SpaceX Enhanced Income ETF (XSHP) began trading last Wednesday, making it the first covered-call ETF playing on the SpaceX theme, according to VettaFi head of research Todd Rosenbluth. “In my 20 years covering the ETF market, I have seen no new stock listing create an impact quite like SpaceX,” Rosenbluth said. “While we saw several firms launch spot bitcoin ETFs simultaneously, the introduction of leveraged and enhanced income ETFs for SpaceX has occurred much faster – within just one week of the initial listing.” Income from a volatile stock Kurv has a suite of single-stock income ETFs, including its Yield Premium Strategy Amazon ETF (AMZP) and Yield Premium Strategy Tesla ETF (TSLP) . The firm’s SpaceX income fund has a long exposure to the stock and uses a call spread – a variation of the covered call strategy – to generate income, according to Howard Chan, Kurv founder and CEO. A call option gives the holder the right to buy a stock at a specified price, known as a strike price, by a certain date. With the call spread strategy in this ETF, a call is sold to generate premium at a stated price, and another call option is bought at the same time at a higher strike price to capture potential upside. While the fund hasn’t been around long, the strategy is working as SpaceX navigates its latest bout of volatility, Chan said. As of Tuesday afternoon, the stock is on pace to snap a three-day losing streak. “The first call option we sold expired out of the money, so we got the premiums,” he said. “There were three straight days of sell-offs, and we have captured some premium for income distribution.” The fund allows investors to play the stock without necessarily making a directional bet on where it’s heading, according to Chan. “We have a slightly different view on SpaceX itself,” he said. “Our perspective is up until the first two or three earnings [releases], people are really buying it on hope.” XSHP aims for monthly distributions. It has an expense ratio of 0.99%. Due diligence on income generation Complexity and costs are some of the biggest hurdles facing investors who want to dip into derivative income ETFs. “Single stock options income ETFs are risky as a concept, but on a so-far unproven stock, it makes it difficult to understand the risk/return/income profile an investor should expect,” said Zachary Evens, manager research analyst at Morningstar. Unsustainable distributions are another issue for investors to watch out for as they consider derivative income ETFs. This is when the fund manager distributes more than just the premium they get from their options activity, taking a bite into the fund’s net asset value. “Something that gives you back a 100% distribution? That’s likely going to generate NAV erosion,” said Chan. “If it’s too good to be true, then it’s too good to be true.”
