CEPI: REX's New Covered Call ETF Combines Crypto With Big Yields

It was just a few years ago that most of covered call ETFs involved strategies built around the major indices. They seemed fairly straightforward - write short-term call options and collect the premium income, altering the risk/reward profile but generating a high yield in exchange.

In the last couple of years, however, this space has evolved rapidly. Today, covered call ETFs offer exposure to much narrower sections of the market, single stocks and even use 0DTE options to really ratchet up the income potential. Now, if you want to capture a high yield (or in some cases, a REALLY high yield), covered call ETFs offer a wide range of options.

Crypto is the latest market to become a target of the covered call ETF space. It makes sense too because higher volatility generally leads to the ability to capture higher premium income from written options. If you’re looking to add a well above average yield to your portfolio, a covered call ETF using crypto as its foundational asset class could deliver for you.

That’s why I was very interested in the launched of the REX Crypto Equity Premium Income ETF (CEPI) earlier this month. It uses crypto-related stocks as its underlying portfolio while adding written options on those stocks to produce ultra-high yields.

To be clear right off the bat, CEPI does not own bitcoin or ethereum. According to the fund’s objective:

This will be a portfolio of roughly a couple dozen heavily crypto-influenced stocks mostly existing within the innovative tech and digital payments spaces. These companies are actively engaged in crypto-related activities, such as cryptocurrency mining, trading, custody, blockchain technology development and the creation of digital payment solutions. The index is weighted by modified free float market capitalization and is reconstituted quarterly and rebalanced monthly.

The fund intends to write call options on approximately 100% of its holdings of each portfolio security. The income generation strategy will involve writing out-of-the-money call options, which would be expected to allow for some capital appreciation potential in the portfolio. How far out-of-the-money these calls will be will depend on market conditions at the time. Options written are expected to have a remaining maturity of 30 days or less.

That makes CEPI’s option income strategy standard and pretty straightforward. It simply intends to write monthly options on the entire portfolio, something that’s common with the larger ETFs in this space. That should provide some protection from the higher volatility associated with single stock strategies and/or strategies involving 0DTE options. That could make CEPI more appropriate for a wider range of investors.

The underlying holdings within the portfolio itself are roughly what you’d expect.

How are securities selected for inclusion in the underlying portfolio? After screening out companies with market caps of less than $75 million and low liquidity, the index categorizes companies within one of three groups - purity leaders, revenue leaders and those with direct exposure to crypto assets.

• Purity Leaders - securities of companies with thematic exposure accounting for 50% or more of their total revenue are included

• Revenue Leaders - the top 10 companies by absolute thematic revenue dollar amount—calculated by multiplying total revenue by thematic exposure percentage—are selected

• Direct Exposure to Crypto Assets - companies holding crypto assets valued at least $10 million are included.

All in all, these criteria do a pretty good job of targeting high crypto exposure as to just any exposure you’ll find in some ETF selection criteria. You could argue that some of the companies being held by the fund aren’t as pure play as you might like, but I think CEPI gets it right more often than not.

What I also like is the 5% cap on individual holdings. While the fund uses a market cap weighting approach that gives bigger allocations to larger companies, the individual weighting cap helps ensure diversity and mitigate overconcentration risk.

CEPI joins two other existing covered call ETFs in the REX lineup - the REX FANG & Innovation Equity Premium Income ETF (FEPI) and the REX AI Equity Premium Income ETF (AIPI). They also join the T-Rex lineup of leveraged and inverse single stock ETFs, which include 2x and -2x versions featuring MicroStrategy, Tesla and NVIDIA as well as bitcoin and ethereum.

Click the link above for more information on these funds.