SoFi expands ETF business with options-driven income fund

Key Points

• SoFi recently launched the SoFi Enhanced Yield ETF (THTA) which uses an options overlay strategy and is designed to provide investors with a high level of monthly income.
• Options-powered funds use call or put options (or more exotic spread strategies) to hedge risk or boost returns.
• SoFi also offers SFY, a worthy alternative to the hugely popular SPY because SoFi waives management fees, giving the fund an effective 0% expense ratio.

In the growing universe of exchange-traded funds (ETFs), SoFi Technologies, Inc. NASDAQ: SOFI is known for its clever names. 

There’s the SoFi Be Your Own Boss ETF (BYOB) that invests in (not booze but) flexible work pioneers like Shopify, Mercadolibre and Coinbase Global. Then you have the SoFi Weekly Income ETF (TGIF) that distributes bond income every Friday…just in time for a night out on the town. TGIF’s stock cousin, the SoFi Weekly Dividend ETF (WKLY), pays cash dividends monthly. 

The digital financial services company, however, is getting right to the point with its latest fund offering. It recently launched the SoFi Enhanced Yield ETF (THTA), whose name and investment style are not unique. The brand-new active fund is designed to provide investors with a high level of monthly income. WisdomTree and some smaller fund families offer similar ETFs.

What is unusual about THTA is the strategy deployed to generate periodic cash payouts. In addition to one- to three-month U.S. Treasury bills, the fund uses an options overlay strategy. Florida-based investment group ZEGA Financial, a leader in options-focused investing, manages this aspect of the portfolio.

By combining short-term government bills with options trades, THTA is able to leverage its Treasury holdings to generate extra income. This income is captured through the sale of volatility premiums, i.e., put options that are based on the inherent risk in bond options spreads. The data-driven, opportunistic alternative to traditional short-term bond funds is taking advantage of volatility to give investors bigger monthly payout potential.   

Only $2.5 million has been invested in THTA so far, but the fund is likely to get attention for two reasons. First, in a high interest rate, inflationary environment, Americans are looking for all the cash they can get. Second, SoFi’s membership is growing rapidly. In the third quarter of this year, SoFi members were up 47% year-over-year to 6.9 million. With an expanding product lineup and a consumer-friendly app, SoFi’s quest to foster financial independence is progressing — especially among mobile-first younger generations. 

The launch of THTA is not only well-timed given the economic landscape but also consistent with ETF market trends. Options-powered funds are one of the hottest developments heading into 2024.  

What are options-powered funds?

Given the billions of dollars pouring into artificial intelligence (AI) technologies that rely on massive datasets, it’s no surprise that investment fund managers are using data analytics to gain a competitive edge. Nowadays, there are even ‘AI-enhanced’ ETFs that use machine learning tools coming onto the market. 

In the case of ZEGA Financial and the THTA fund, a high probability risk model is used to capitalize on option spreads. The ETF is one of several options-backed funds bursting onto the scene in 2023. A caveat: at a 0.49% expense ratio, THTA doesn’t come cheap.

Options-powered funds use call or put options (or more exotic spread strategies) to hedge risk or boost returns. Product growth stems from investors’ increasing interest in using alternative approaches to enhance their returns or protect their wealth. With the U.S. stock market closing back in on record highs, expect options-driven ETFs to remain a popular way for investors to lock in gains — or squeeze more gains out of a pricey market.

What are some of SoFi’s other ETFs?

SoFi’s equity fund offerings include the SoFi Select 500 ETF (SFY), a competitor to the hugely popular SPY ETF. SFY is a worthy alternative to SPY because SoFi waives management fees, giving the fund an effective 0% expense ratio. The SoFi Next 500 ETF is a U.S. mid-cap fund that weights stocks based on past sales growth and future revenue estimates.   

From there, the company branches into specialty ETFs focused on a particular sector or theme. One of its best-known funds is the SoFi Social 50 ETF (SFYF) which simply invests in what the SoFi community is buying. The socially-driven fund was up 46.8% year-to-date through November 30th and contains retail investor favorites like Tesla, Apple and Microsoft. The SoFi Web 3 ETF (TWEB) for next-gen Internet companies and the SoFi Smart Energy ETF (ENRG) for clean energy companies round out the SoFi stock ETF platform.

On the fixed income side, TGIF and THTA are holding down the fort for now. If THTA delivers a high yield as promised and gains traction, expect SoFi to roll out other options-enhanced ETFs in 2024.