RDTE: Equity-Like Exposure In The Russell 2000 Index For Income Investors (BATS:RDTE)

The Roundhill Russell 2000 0DTE Covered Call Strat ETF (RDTE) is a buy-write strategy designed to provide investors with equity-like exposure to the Russell 2000 Index (RUT) while earning income through the sale of zero days to expiration (0DTE) call options. Buy-write strategies can be used by income-oriented investors seeking equity exposure while earning regular distributions during the duration of their holding period. With weekly distributions largely in the form of return of capital, RDTE can be utilized for taking income distributions without the need to sell or rebalance shares.

About Roundhill Russell 2000 0DTE Covered Call Strat ETF

RDTE was launched on September 10, 2024, on the Cboe BZX Exchange. The strategy has a gross expense ratio of 97bps, a significant discount when compared to its closest peer strategy offered by YieldMax (RDTY). RDTE has moderate liquidity with $170mm in net assets and an average of $3mm in share value changing hands on a daily basis. Accordingly, the fund has a 30-day median bid/ask spread of 0.17%, a modest cost but not a deterrent.

RDTE utilizes a synthetic covered call strategy in order to gain both long and short exposure to RUT. Similar to a covered call strategy, a synthetic covered call strategy gains both long and short exposure to the underlying asset, selling the covered call options at a higher strike price. The biggest differentiator is that a synthetic covered call strategy is entirely made up of derivatives in order to gain long and short exposure.

In order to do this, RDTE will buy deep-in-the-money, long-dated call options and/or flex call options for the long exposure to RUT while selling out-of-the-money 0DTE for its short position. 0DTE options are those that expire within the same day in which they are written, effectively eliminating all Theta risk. It should be noted that an investment in RDTE is not a direct investment in RUT; investors will only gain indirect exposure to RUT through the use of call option exposure. RDTE also holds a small position in the Roundhill Weekly T-Bill ETF (WEEK) for liquidity.

One of the benefits of buy-write strategies is their ability to generate a relatively high distribution rate. While a large portion of the distribution is derived from return of capital (ROC), this can be ideal for investors taking distributions as income, as the investor may not need to actively sell, reposition, or rebalance their portfolios in order to raise cash.

RDTE has a weekly distribution largely derived from income generated from options premium earned. Over the last twelve months, RDTE has paid out $12.84/share, yielding 43.61%. Investors must bear in mind that the majority of the distribution will derive from ROC, meaning that a portion of your investment will be returned to you with every distribution. This will result in NAV erosion over time, as the price return chart below depicts.

When evaluating these types of strategies, it may be best to compare performance based on total returns rather than price returns, which will provide a complete profile of price performance plus distributions rather than just price. The second chart exhibits RDTE compared to RUT on a total return basis. Given that the performance of RDTE is relatively similar to RUT, we can expect that the fund is efficiently managed net of costs associated with options trading.

Investor Suitability

RDTE can be best utilized for income-oriented investors seeking equity-like exposure to the Russell 2000 Index. Given the high level of ROC, RDTE can be ideal for investors taking regular cash distributions, as the use of the fund may limit the need for regular rebalancing and cash raises.

Given the high level of ROC, RDTE may not be appropriate for tax-sensitive investors, as ROC will create certain intricacies in how returns are taxed. ROC is a tax-deferred benefit when reinvested. ROC will lower the cost basis of the investment with each distribution until the cost basis reaches zero. From there, excess ROC will be taxed as short-term capital gains, or ordinary income, which may impact the investor’s tax rate.

Risks To Consider When Investing In RDTE

RDTE is a synthetic covered call strategy on the Russell 2000 Index, exposing investors to certain risks that should be considered prior to making a final investment decision. Investors will gain equity-like exposure to RUT and may experience greater volatility when compared to fixed income funds. The covered call component of the strategy may cap the full upside potential of RDTE if the underlying Index were to exceed the strike price of the short call options. While upside potential may be limited, investors will be exposed to the full downside risk resulting from the long call options. In the event of a severe downturn, RDTE could experience significant losses, resulting in the long call options losing a substantial amount of value. RDTE is an actively managed fund, meaning that investors will be exposed to manager risk and the portfolio management team’s ability to effectively manage RDTE’s options strategy.

Final Thoughts

RDTE can be best utilized by income-oriented investors seeking equity-like exposure to the Russell 2000 Index while earning weekly income derived from options premium earned. The strategy may be most suitable for those taking regular distributions as an efficient portfolio management strategy, potentially requiring fewer portfolio rebalances.

This article answers three main questions about RDTE:

• What type of investor is RDTE best suited for?
• Are there specific concerns about RDTE’s payouts that investors need to take into consideration?
• How is the RDTE portfolio structured?