HCOW

Strategy Overview: Uncorrelated High Income

The Kelly Dividend Leaders Covered Call Strategy is an actively-managed strategy that seeks to provide high monthly income through the ownership of dividend paying companies with high free cash flow yield combined with a call income strategy component on each constituent.

• The Underlying Index (COWSETF Index) factors in Forward FCF Yield (defined as estimated forward-year free cash flow per share divided by share price) as part of its screening process to eliminate hindsight bias that plagues other FCF indexes that only use trailing FCF Yield.
• Option Writing: Target 1-2% monthly income while seeking to balance high income and capital appreciation through investment exposure to the underlying equities.
  • Focus on selling out-of-the-money calls
  • Focus on selling on a portion of the portfolio to hit the target monthly income
• Covered call writing is a time-tested approach that can add income, dampen volatility and diversify both equity and fixed income core strategies.
• Risk & Sector Controls: The COWSETF Index may minimize idiosyncratic risks by implementing an industry cap of 24%. Getting in and out of the right sectors at the right times is difficult for several reasons, including the nature of rebalancing and the lag effect. There should be a focus on risk exposure and diversification, especially to avoid idiosyncratic sector risks.
• Free cash flow is the cash remaining after a company has paid expenses, interest, taxes, and long-term investments. It can be used to buy back stock, pay dividends, or participate in mergers and acquisitions. The ability to generate a high free cash flow yield indicates a company is producing more cash than it needs to run the business and can invest in growth opportunities.
• Free Cash Flow (FCF) Yield measures the amount of cash generated from the core operations of a company relative to its valuation.
• Kelly Dividend Leaders Covered Call Strategy seeks to:
  • Produce attractive returns
  • Reduce risk
  • provide additional high option income

Strategy Linked Products

Diversification Tool

Offers a tool for diversification due to little overlap with traditional income strategies.

Covered call writing is a time-tested approach that can add income, dampen volatility and diversify both equity and fixed income core strategies. Adding a covered call strategy in a core satellite, multi-asset-class approach can be accomplished as:

• A hedged equity strategy with an “income kicker” to enhance overall income production
• A supplement to a core large-cap strategy (especially late in the market cycle when valuations are long-in-the-tooth and price action is volatile) as a means of boosting income and mitigating downside risk

A better-yielding alternative to a high yield bond allocation

Sector Exposure

• The Index uses company classification data structured in Syntax’s proprietary Functional Information System (FIS), which draws primarily from audited annual reports (e.g., 10-K filings) and secondarily from unaudited documents (e.g., news articles, company websites) to allow granular groupings and comparisons of companies by the characteristics of their various product lines.
• The Index’s Universe is drawn from the Syntax US 1000 Index (SY1000). Candidates are identified using Syntax FIS data classifying their issuing entities as outside the Financials Sector.

Differentiated Sector Allocation: The index is invested in 60 companies spread across 21 sub-sectors that can be found in six primary sectors. The asset allocation of the index will migrate over time to sectors and companies as they become more attractive.

Data as of: March 31, 2025