VistaShares

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VistaShares delivers innovative Liquid Alternative investment solutions for today's investors. VistaShares ETFs are actively managed by industry and investment experts, offering a number of distinct strategies. Supercycle® Growth Equity ETFs seek exposure to technology-driven economic Supercycles® that the adviser believes may offer long-term growth potential. Target 15® option-income ETFs seek to generate monthly income while complementing a core equity portfolio. Income is not guaranteed and will vary, and the Target 15® name refers to the strategy's objective rather than a guaranteed or promised return. Investing involves risk, including possible loss of principal. There is no guarantee that any investment objective will be achieved, and past performance does not guarantee future results.

What a distribution rate is and is not

Income funds often quote a distribution rate. It is usually calculated by taking the most recent payment, scaling it up to a full year, and dividing by the fund's current price. Some funds quote a trailing version instead, summing the payments over the last year. Both are arithmetic about payments. Neither is a measure of what the fund earned.

A fund paying out a high rate while its price drifts down is handing back part of the money its holders put in. A fund paying a modest rate while its price climbs is doing something quite different. The two can quote very different rates and deliver similar total returns, or quote the same rate and deliver very different ones.

The rate also depends on the price on the day it is calculated, so it moves every day even when the payment does not. A falling price makes the same payment look larger. That is a property of the arithmetic, not news about the fund.

So the rate is more usefully read as a description of the payment schedule, and total return as the description of the result, and the two should never be confused for each other.

It is also worth checking which version of the rate is being quoted. A rate built from the latest monthly payment can move sharply if one payment is unusually large or small, while a trailing rate smooths that out but describes a year that has already passed.

None of this makes the rate useless. It is a fair description of what a fund is currently paying relative to its price. It simply answers a narrower question than the one most people are asking when they look at it.

How option income funds produce their payments

A growing group of income funds produce their payments by selling options, most often covered calls, on the stocks or index they hold. Selling a call brings in a premium immediately and gives someone else the right to buy the holding at a set price. If the price rises past that level, the fund gives up the gain above it. The premium is paid in exchange for that upside.

This makes the payment and the market linked in a specific way. When markets are volatile, option premiums tend to be larger and the payments can rise. When markets climb steadily, the fund keeps the premium but misses much of the climb. Over long stretches, the strategy tends to look smoother than the market and to lag it in strong years.

Option premium can be paid out as a distribution, and depending on how the options are structured and taxed, a payment may be classified as income, gains or return of capital. The notices that accompany each payment, and the year-end tax form, say which.

The useful comparison for a fund of this kind is not its payment rate against another fund's, but its total return against the holdings it writes options on, over periods that include both calm markets and rough ones.

There is also the question of what happens to the holdings over time. A fund that sells calls on a holding that keeps rising will see that holding called away or rolled to higher prices, and how the fund manages that process shapes both its payments and its price.

It also helps to know which options the fund sells and how often. Selling options close to the current price brings in more premium and gives up more upside; selling them further away does the reverse. That choice shapes the fund more than the label does.

About this domain

vsharesteam.com belongs to VistaShares. We send email from it, and everything we publish sits on our main website at vistashares.com instead.

If a message from vsharesteam.com reached you and you want to confirm it came from us, write to info@vistashares.com or call (844) 875-2288.

What the mail from here is about

Mail from this address is about income funds: ETFs and mutual funds that pay distributions on a regular schedule, often monthly. The subject is how those payments work and what they are made of, which turns out to matter more than how large they are. A distribution is a transfer from the fund to its holders, and the same payment can be built from very different things.

The questions that reach this address are usually about the gap between a stated rate and a fund's total return, and about the notices that explain where a payment came from.

Both are worth reading closely, and neither is read as often as the headline number.