INVESTMENT CASE FOR PUT WRITING

Transcription

1 WisdomTree RESEARCH INVESTMENT CASE FOR PUT WRITING Authored by: Gaurav Sinha (Asset Allocation Strategist)

2 WisdomTree RESEARCH INVESTMENT CASE FOR PUT WRITING 2 INTRODUCTION TO THE WISDOMTREE CBOE S&P 500 PUTWRITE STRATEGY FUND In February 2016, WisdomTree launched its first option 1 selling strategy ETF, the WisdomTree CBOE S&P 500 PutWrite Strategy (PUTW). This strategy is designed to receive premiums from option buyers by selling monthly at-the-money 2 S&P 500 Index put options (SPX puts) against a cash-collateralized account. If the S&P 500 Index falls below the SPX put s current strike price, the option finishes the month in the money, and the Fund pays the buyer the difference between the strike price 3 and the value of the S&P 500 Index. If the S&P 500 Index remains above the current strike price, the Fund keeps the premiums from the prior month. This is an incomegeneration strategy that acts as a shock absorber when the S&P experiences a drawdown. PUTW tracks the Cboe S&P 500 PutWrite Index (PUT), which has a live track record of more than 10 years. This white paper will take a deep dive into several aspects of PUTW and the Fund s underlying strategy. + Comparing this strategy and the associated risk/return trade-offs of other strategies Comparison to the relatively old concept of selling covered calls The risk mitigation aspect of put writing and its return distribution compared with the S&P How can put selling fit into an asset allocation? What other risk-mitigation tools, like cash or short duration bonds, can miss + Recent trends in correlations and volatility Is this the time to sell puts? Signals to watch for a spike in volatility Since we have a 10-year live track record for the Fund s underlying Index (PUT), we will reference this track record frequently in our analysis below. COMPARING THE RELATIVELY NEW CONCEPT OF PUT SELLING AND ITS ASSOCIATED RISK/RETURN When WisdomTree decided to launch a put option fund in February 2016, we had a choice. We could have launched a fund tracking the Cboe S&P 500 BuyWrite Index, which sells covered calls (a relatively familiar concept), but we ultimately decided on tracking a relatively new concept, the Cboe S&P 500 PutWrite Index. As a concept, the buy-write strategy has existed for a number of years and has a track record. As such, it would have made more sense for us to go in that direction. Also, if we go strictly by theory, the buy-write strategy should have a similar pay-off as the put-write strategy, something called put call parity 4 in the financial world. So why did WisdomTree choose a newer concept in the market? 1 Options: A financial derivative. The contract offers the buyer the right, but not the obligation, to buy (call option) or sell (put option) the underlying asset at an agreed-upon price during a certain period or on a specific date. 2 At the money: Term used to describe the relationship between an option s strike price and the underlying security s price. An option is said to be at the money if the current stock price is equal to the strike price. 3 Strike price (or exercise price): The fixed price at which the owner of the option can buy (in the case of a call), or sell (in the case of a put), the underlying security. 4 Put call parity: In financial mathematics, put call parity defines a relationship between the price of a European call option and a European put option, both with the identical strike price and expiry, namely that a portfolio of a long call option and a short put option is equivalent to (and hence has the same value as) a single forward contract at this strike price and expiry.

3 WisdomTree RESEARCH INVESTMENT CASE FOR PUT WRITING 3 To answer that, let s stick to the basics of analyzing asset allocations through efficient frontiers. In the exhibit below, we plot risk/return trade-off for three pairs of investments: + Allocation 1: S&P 500 and BuyWrite Indexes along the lower (teal) edge + Allocation 2: S&P 500 and PutWrite Indexes along the upper (blue) edge + Allocation 3: BuyWrite and PutWrite Indexes along the leftmost vertical (grey) edge Figure 1: Efficient Frontiers For Portfolios of S&P 500, Buy Write and Put Write Index % S&P Annualized Total Returns Increasing Allocation to Put Write Index in Increments of 1% 100% Put Write Index Increasing Allocation to Buy Write Index in Increments of 1% % Buy Write Index Annualized Std. Deviation Source: Bloomberg, for period 6/30/07 to 6/30/18 (i.e., entire live period for PUT). Past performance is not indicative of future results. You cannot invest directly in an index. Index performance does not represent actual fund or portfolio performance. A fund or portfolio may differ significantly from the securities included in the index. Index performance assumes reinvestment of dividends but does not reflect any management fees, transaction costs or other expenses that would be incurred by a portfolio or fund, or brokerage commissions on transactions in fund shares. Such fees, expenses and commissions could reduce returns. A few takeaways are apparent from this chart: + For similar levels of return, a 100% investment in the Cboe S&P 500 PutWrite Index (PUT) had substantially less volatility 5 compared to a 100% investment in the S&P 500 Index. + For similar volatility, a 100% investment in PUT had substantially higher returns compared to the Cboe S&P 500 BuyWrite Index. + For every combination of S&P 500 and BuyWrite, there existed a combination of S&P 500 and PUT that had higher returns with a similar level of volatility. Portfolio performance during periods of market stress is equally important. For this, we did the same analysis for the period of November 2007 to February This was the peak of the financial crisis, where the S&P 500 went from its high of 2,424 on October 31, 2007, to its trough of 1,189 on February 27, 2009, losing more than half its value. 5 Volatility: A measure of the dispersion of actual returns around a particular average level. Also known as standard deviation.

4 WisdomTree RESEARCH INVESTMENT CASE FOR PUT WRITING 4 Compared to 100% equity index which was down 41.5% on an annualized basis, PUT index suffered a drawdown of only 25%. In other words, PUT offered downside protection of 16.5%, when it was needed most. Here again, the BuyWrite Index provided protection versus the S&P 500 Index but still lagged when compared to PUT. Figure 2: Allocating Put Write To an Equity Portfolio At The Peak of Financial Crisis Not Just Lowered Volatility But Also Provided Higher Total Returns -20 Annualized Total Returns (%) % Buy Write Index Incrementally adding Buy Write to S&P 500 in Steps of 1% 100% Put Write Index Incrementally adding Put Write to S&P 500 in Steps of 1% 100% S&P 500 Tr Annualized Standardized Deviation (%) Source: Bloomberg, for period 10/31/07 to 2/27/09. Past performance is not indicative of future results. You cannot invest directly in an index. This chart represents risk/return of various hypothetical allocations. The table below summarizes the risk and returns of PUT compared to the S&P 500 and the BuyWrite Index for the 10 years ending April 30, 2018, including the period of market stress mentioned above. Figure 3 Company Name Overall Period 06/29/ /30/2018 Stress Period 10/30/ /27/2009 Annualized Total Return Annualized Standard Deviation Sharpe Ratio* Annualized Total Return Annualized Standard Deviation Sharpe Ratio* S&P Total Return % 19.62% Put Index % 18.95% Buy Write Index % 18.56% Source: Bloomberg. *Return per unit risk (i.e., Annualized Total Return/Annualized Standard Deviation 6 ). Past performance is not indicative of future results. You cannot invest directly in an index. 6 Standard deviation: A measure of how widely an investment or investment strategy s returns move compared to its average returns for an observed period. A higher value implies more risk, in that there is more of a chance the actual return observed is farther away from the average return.

5 WisdomTree RESEARCH INVESTMENT CASE FOR PUT WRITING 5 It s clear that: + During this 10-year period, investors may have been better off with in-option selling strategies, and, contrary to the perception of some, these strategies would have provided better risk-adjusted returns 7. + In this category, we also note that put selling offered better risk-reward trade-offs throughout this 10-year period, at the market peak and at the trough. Finally, it is important to remember that during this period the markets benefited from a massive liquidity injection by the Federal Reserve (Fed) under its quantitative easing (QE) policy. Investors may not choose to buy portfolio insurance when everything is going well, and therefore insurance premiums tend to go down during such periods. The put-write strategy essentially collects insurance premiums to help cushion against market drawdowns 8. The strategy had a higher Sharpe ratio during the bull market run for the S&P 500. How will these insurance premiums pay off when the S&P 500 heads down? UNDERSTANDING THE DAILY RETURN DISTRIBUTION OF THE PUTWRITE INDEX Understanding a strategy s daily return stream in relation to a benchmark is key for investors. Therefore, in this section we will start with a deeper dive into the put-write daily return stream. The chart below shows daily returns of the S&P 500 on the horizontal axis with PUT returns on the vertical axis. What we notice in this plot is that the vast majority of the dots lie above the 45-degree line in the southwestern quadrant, which represents days with negative returns for the S&P 500. Being above the 45-degree line implies outperformance by PUT on those days. PUT outperformed the S&P % of the time on days when the S&P 500 had negative returns. The table below shows detailed statistics on the upside and downside. On average, PUT declined by 61 basis points (bps) compared with a decline of 89 bps for the S&P 500, thereby providing an average cushion of 28 bps. Of course, things reversed when the S&P 500 rallied. 7 Risk-adjusted returns: Returns measured in relation to their own variability. High returns with a high level of risk indicate a lower probability that actual returns were close to average returns. High returns with a low level of risk would be more desirable, as they indicate a higher probability that actual returns were close to average returns. 8 Drawdown: Period of sustained negative trends of returns.

6 WisdomTree RESEARCH INVESTMENT CASE FOR PUT WRITING 6 Figure 4: Put Index Outperformed S&P Index More than 95% Times on Down Days Put Index Returns (in %) S&P 500 Index Returns (in %) Company Name Negative Return Stream Positive Return Stream S&P 500 Index PUT Index S&P 500 Index PUT Index Mean Return -0.87% -0.61% 0.78% 0.39% Median Return -0.50% -0.28% 0.51% 0.17% Standard Deviation 1.05% 0.91% 0.93% 0.66% Source: Bloomberg, for period 6/30/07 to 6/30/18. Past performance is not indicative of future results. You cannot invest directly in an index. Index performance does not represent actual fund or portfolio performance. A fund or portfolio may differ significantly from the securities included in the index. Index performance assumes reinvestment of dividends but does not reflect any management fees, transaction costs or other expenses that would be incurred by a portfolio or fund, or brokerage commissions on transactions in fund shares. Such fees, expenses and commissions could reduce returns.

7 WisdomTree RESEARCH INVESTMENT CASE FOR PUT WRITING 7 Classic risk management literature emphasizes a bell-shaped distribution of returns. This involves bucketing daily returns in slots and counting the number of observations corresponding to each slot. If a strategy is less volatile, its returns would be concentrated closer to zero, leading to what is known as thinner tails, as shown in this chart. Figure 5: Thinner Tails of PUT Index - Implied Better Protection for Investors Number of Observations PUT Index S&P Tr. Index PUT Index Returns Had a Slight Shift Towards Positive Side i.e.more Density of Daily Returns in Positive Territory PUTW Returns Having Higher Concentration in the Middle S&P 500 Returns More Spread Out, Implying Higher Probability of Extreme Returns on the Down Side Monthly Return Buckets (in %) Source: Bloomberg, 6/30/07 6/30/18. Past performance is not indicative of future results. You cannot invest directly in an index. When we plot this exhibit for the S&P 500 and PUT, a few patterns are immediately obvious: + PUT returns were more concentrated in the middle (closer to zero in either direction). + S&P 500 returns had a wider variance, with a frequent observation of days with greater than +/- 2% returns. At a granular level, PUT exhibited a return profile that provided outperformance on the downside by deviating less from the middle a return profile of an instrument that risk managers love!

8 WisdomTree RESEARCH INVESTMENT CASE FOR PUT WRITING 8 ASSET ALLOCATION WITH PUT SELLING Now that we have established that put writing can act as a risk-mitigating strategy, a question arises: Why can t I just invest in cash to achieve the same goal? To answer this question, we looked at various combinations of the S&P 500 Index, PUT and cash investments. The chart below shows that all allocations of the S&P 500 and PUT yielded higher total returns compared to all combinations of the S&P 500 and cash. It also shows that for any given blend of the S&P 500 and cash up to 24% cash, an alternative allocation of the S&P 500 and PUT offered similar volatility but higher returns. The chart below highlights three allocations where this is true. + Allocation 1: [5% Cash/95% S&P 500] or [15% PUT/85% S&P 500] + Allocation 2: [10% Cash/90% S&P 500] or [33% PUT/67% S&P 500] + Allocation 3: [23% Cash/77% S&P 500] or [100% PUT] Figure 6: Allocating to PUT Offered Better Risk/Reward Than Cash For Equity Investors 06/30/ /30/ Blending PUT to S&P 500 in Increments of 1% Blending Cash to S&P 500 in Increments of 1% 100% S&P 500 Annualized Returns Allocation 3 77% S&P % Cash OR 100% PUT Allocation 2 90% S&P % Cash OR 67% S&P % PUT Allocation 1 95% S&P % Cash OR 85% S&P % PUT Annualized Risk (Std. Deviation) Source: Bloomberg, for period 6/29/07 to 6/30/18. Past performance is not indicative of future results. You cannot invest directly in an index. This chart represents risk/return of various hypothetical allocations. Some investment managers concerned about the potential drawdown during periods of market stress might suggest higher allocations to cash to dampen the impact. As the chart below illustrates, combining the S&P 500 and PUT provided a better risk/reward trade-off than combing the S&P 500 with cash.

9 WisdomTree RESEARCH INVESTMENT CASE FOR PUT WRITING 9 Figure 7: PUT Provided Better Risk/Reward During Stress Times % PUT Annualized Returns Blending PUT to S&P 500 in Increments of 1% Blending Cash to S&P 500 in Increments of 1% % S&P 500 Annualized Risk (Std. Deviation) Source: Bloomberg, for period 12/31/07 to 12/31/09. This time frame was chosen to include the complete period of the financial crisis. Past performance is not indicative of future results. You cannot invest directly in an index. This chart represents risk/return of various hypothetical allocations. In the table below, we quantify and compare the portfolios highlighted above over the 10-year period as well as for the period of the financial crisis. Not only did PUT alternatives have better returns for the entire period (barring Allocation 3), they also outperformed their cash peers during periods of market stress. For example, Allocation 2, with 10% Cash/90% S&P 500 versus 33% PUT/67% S&P 500: + Overall period PUT alternative outperformed by 20 bps annualized, with a similar level of risk. + Financial crisis PUT alternative outperformed by 120 bps annualized, with slightly higher risk.

10 WisdomTree RESEARCH INVESTMENT CASE FOR PUT WRITING 10 Figure 7: Comparing a Few Key Allocations Between Equities, Cash and PUT with Similar Overall Risk Characteristics Company Name Overall Period 06/29/ /30/2018 Financial Crisis 12/31/ /31/2009 Annualized Ret. (%) Annualized Risk (%) Annualized Ret. (%) Annualized Risk (%) S&P Total Return 100% S&P Allocation 1 95% S&P % Cash % S&P % PUT Allocation 2 90% S&P % Cash % S&P % PUT Allocation 3 77% S&P % Cash % PUT Source: Bloomberg. Past performance is not indicative of future results. You cannot invest directly in an index. This chart represents a hypothetical scenario. The put-write strategy offers risk mitigation just like cash; however, the real benefit comes from holding it for longer periods, where, unlike cash, it also provides upside participation. An allocation to the put-write strategy partially mitigates risk while still offering participation on the upside.

11 WisdomTree RESEARCH INVESTMENT CASE FOR PUT WRITING 11 PUTWRITE STRATEGIC VS. TACTICAL ALLOCATION? This leads us to an important question: Is this a good time to get into the put-write strategy? There are two answers to this question: + Short Answer: Any experienced investor can tell you that total returns are about time in the market rather than timing the market. Thus, a strategy serving to dampen volatility during tough days could be a boon for strategic investors over time. + Longer Answer: Let s break out market periods during which there was a sudden surge in short-term volatility. The analysis below reviews tactical rotation when near-term volatility was higher than long-term volatility on a given option settlement day. We evaluated option expiration days when the 10-day moving average of the Volatility Index (VIX) 9 was greater than the 200-day moving average. We are segregating months that followed those options-closing Fridays when there was a sudden surge in volatility from all other months. An investor rotating into the put writing strategy only on those Fridays when near-term volatility (10-day VIX moving average) was surging over long-term volatility (200-day VIX moving average) and holding to it for the next 22 trading days (i.e., one month) would have cumulatively and on average outperformed the S&P 500. Figure 8: Analyzing Performance of PUT when Volatility Spikes Company Name When Near Term VIX Surges on Monthly Option Settling Fridays All Other Monthly Option Settling Fridays Cumulative Performance over Following 22 Trading Days Average Performance over Following 22 Days Cumulative Performance over Following 22 Trading Days Average Performance over Following 22 Days PUT 55.86% 1.07% 66.96% 0.84% S&P 500 Tr 48.85% 0.94% 92.61% 1.16% Spread 7.01% 0.13% % -0.32% Source: Bloomberg, for period 6/30/07 to 6/30/18. Past performance is not indicative of future results. You cannot invest directly in an index. 9 Cboe Volatility Index (VIX): Widely cited measure of volatility, meaning the degree to which an index s actual returns vary from its average returns, synonymous with standard deviation. Higher readings indicate greater potential fear and uncertainty. The VIX uses the average of the expected implied volatility of S&P 500 Index options to determine its volatility measure.

12 WisdomTree RESEARCH INVESTMENT CASE FOR PUT WRITING 12 Figure 9: Periods of High Volatility Lead to Higher Income, but at a Cost of Drawdowns in S&P 500 Average Option Premium Collected (%) Historical Probability of S&P Closing Below Its current Strike On Next Option Settlement % % Periods of Surging Near-Term Volatility 1.73% All Other Periods 40% 38% 36% 34% 32% 30% 28% 26% 22% 20% 38.46% Periods of Surging Near-Term Volatility 30.38% All Other Periods Source: Bloomberg, for period 6/30/07 to 6/30/18. Past performance is not indicative of future results. You cannot invest directly in an index. Periods of rising volatility can cause option premiums to increase; however, they also make the S&P 500 much more likely to decline. Therefore, while the put-write strategy outperforms the S&P 500 due to greater income being collected during periods of high volatility, some of this outperformance may be offset due to the S&P 500 dropping below its strike price over the next month, especially if volatility stays higher. The average option premium was 2.35% during periods of rising volatility, and that was substantially higher than the 1.73% during periods when volatility was not surging. But this has to be juxtaposed with a higher likelihood of the S&P 500 closing below its current level on the next option settlement date. A tactical allocation to PutWrite may outperform the S&P 500 alone, but the real benefit of the put-write strategy comes as a strategic holding. Historically, it has generated strong positive returns as the market rose and has provided downside protection with higher option income during times of market stress, leading to a much less volatile performance. Figure 10: Overall Environment Annualized Returns Annualized Std Deviations Return per Unit Risk (Avg Ret/Std Dev) PUT 6.30% 11.0% 0.57 S&P 500 Tr 7.82% 14.7% 0.53 Source: Bloomberg, for period 6/30/07 to 6/30/18. Past performance is not indicative of future results. You cannot invest directly in an index. Index performance does not represent actual fund or portfolio performance. A fund or portfolio may differ significantly from the securities included in the index. Index performance assumes reinvestment of dividends but does not reflect any management fees, transaction costs or other expenses that would be incurred by a portfolio or fund, or brokerage commissions on transactions in fund shares. Such fees, expenses and commissions could reduce returns.

13 WisdomTree RESEARCH INVESTMENT CASE FOR PUT WRITING 13 Therefore, we recommend the PutWrite Index as a strategic holding and not as a tactical play during periods of rising volatility. DRYING LIQUIDITY SPARKS VOLATILITY AND INDICATORS TO WATCH Experienced investors understand that lack of variability doesn t equate to stability. In 2017, VIX averaged around 10, which is almost half of its long-term average. In sharp contrast, 2018 has so far seen a few extraordinarily volatile days. One day February 5 deserves special attention for two significant moves: + The S&P 500 closing down more than 4% + VIX jumping >20 points in a single day VIX and the S&P 500 are generally negatively correlated; therefore, it is normal for VIX to jump when the S&P 500 declines. However, a 20-point jump in VIX is something that deserves special attention here. Until February 5, since the inception of VIX in March 1990, a jump as high as 20 points in a single day had NEVER happened. Under a normal distribution 10, this was a 5 standard deviation move with a likelihood of 0.002%. Assuming 252 trading days, this event should have occurred on average once per 200 years. By contrast, Halley s Comet appears once every 80 years! Thus, a 4% decline by the S&P is rare, but a 20-point jump by VIX is extreme. The exhibit below shows the relationship between S&P daily returns and VIX daily changes. Looking at the historical relationship, VIX daily changes have had a beta of to S&P daily returns. This simply means that a 4% decline in the S&P 500 should have meant a jump of roughly 4.48 points in VIX. However, VIX jumped about 4.5 times more! Figure 11: VIX Jumps 4.5 Times Its Historical Beta to S&P 500 Returns February 5th, 2018 Daily VIX Changes y = x R² = S&P 500 Daily Returns Sources: Bloomberg, Cboe, for period 3/30/1990 to 2/08/2018. Past performance is not indicative of future results. You cannot invest directly in an index. 10 Normal distribution: A function that represents the distribution of many random variables as a symmetrical bell-shaped graph.

14 WisdomTree RESEARCH INVESTMENT CASE FOR PUT WRITING 14 INCREASING CORRELATIONS FEEDING HIGHER VOLATILITY So a question arises: What s driving this and is this trend here to stay? To answer this, consider the exhibit below, which plots the average of all possible pair-wise trailing six-month correlations 11 of equities in the MSCI USA Index. In a postquantitative easing world, correlations have generally been declining. However, starting in mid-january of this year, there has been a very sharp acceleration in stock correlations. Arguably, therefore, merely allocating to stocks in the current regime is posing a challenge in derisking systematic risk. Figure 12: Pick up in Average Stock Correlations PRE-QE World Nov. 07- Nov 08 INTRA-QE World Nov Oct 14 POST-QE World Dec 14 - Onward Avg. Trailing 6 Month Correlations QE 1 Nov 08 - Mar 10 QE 2 Nov 10 - Jun 11 QE 3 Sep 12 - Dec 13 QE Tapering Dec 13 - Oct 14 Period 1: Rising Correlations and Poor Market Performance Period 2: Declining Correlations and Excellent Market Performance Jul 08 Jul 09 Jul 10 Jul 11 Jul 12 Jul 13 Jul 14 Jul 15 Jul 16 Jul 17 Average Trailing 6 Month Correlations in MSCI USA Index Sources: WisdomTree, Bloomberg, MSCI, as of 4/30/18. Past performance is not indicative of future results. You cannot invest directly in an index. When I analyze further, it seems average correlations have a predictive power to VIX. In the left exhibit below, we again have our average pair-wise stock correlations (trailing six months) across all equities in the MSCI USA Index on the x-axis and the average VIX levels in the month that immediately followed on the y-axis. 11 Correlation: A mutual relationship or connection between two or more things.

15 WisdomTree RESEARCH INVESTMENT CASE FOR PUT WRITING 15 Figure 13: Rising Correlations Acted a Pre-Cursor to Rising Volatility as well as Bigger Dispersion in VIX Rising Correlations a Leading Indicator for Dispersion in VIX Rising Correlations Lead to Consistant Rise in VIX for Following Months VIX Avg. (Immediately Following Month) Max VIX (Next Month) Min VIX (Next Month) Avg. VIX (Next Month) 10% 20% 30% 40% 50% 60% Avg. Stocks Correlations (trailing 6 Month) Buckets of Avg. Stock Correlations (trailing 6 month) Sources: WisdomTree, Cboe, Bloomberg, as of 6/30/18. Past performance is not indicative of future results. You cannot invest directly in an index. Two patterns are immediately obvious: + We live in a world where central banks globally are putting the brakes on quantitative easing or cheap liquidity; this is jolting markets and causing correlations to spike. Higher correlations, in turn, are feeding volatility, thus making it a vicious circle. + Increasing stock correlations within equities are additionally making it harder for investors to look for diversification by simply investing in equities. Thus, beating markets simply through stock selection is getting harder. VIX FUTURE CURVE ANOTHER KEY SIGNAL FOR EQUITY CORRECTION In addition to higher average correlations, another signal that investors could watch which is usually concurrent with market corrections is the shape of the VIX future curve. Many investors are aware of term-structure curves in relation to commodity futures 12 curves. Similarly, VIX can also have a futures curve where different points in the curve imply investors anticipation of implied volatilities at that time. Under normal circumstances, as one moves farther out in the future on the curve, corresponding values should be higher, partly because six months have more uncertainty than, say, one month. In other words, usually six-month minus one-month VIX futures spreads should be positive. Commodity traders refer to this upward-sloping nature of a futures curve as being in contango, and it also implies a roll cost every month that s why investors structurally long in volatility-hedging products face a strategic headwind. 12 Commodity futures curve: A futures curve is a curve made by connecting prices of futures contracts of the same underlying, but different, expiration dates. A commodity futures curve is based on commodity futures contract prices.

16 WisdomTree RESEARCH INVESTMENT CASE FOR PUT WRITING 16 The exhibit below shows a standardized series of VIX one-month and six-month futures contracts going back 10 years. Out of about 2,610 trading days, there were about 1,193 days (46% of the time) when the one-month standardized VIX was higher than the standardized six-month VIX. To put it simply, VIX one-month futures surged faster than VIX six-month futures (highlighted in red on the lower chart). It happened during the financial crisis of and during the Greek default and euro contagion in 2011, and most recently this inversion started on January 29, right before a big spike in VIX on February 5 ahead of the substantial decline in equities in the weeks that followed. Acceleration in the near-term over medium-term VIX can thus be a strong signal of heightened volatility and possible market corrections. What can take investors by surprise is that with an occurrence rate of almost 50% (1,193 days out of 2,610 days), this acceleration is not uncommon! Figure 14: VIX 1 Month Volatility Surpasses VIX 6 Month 2.50 Spread Standardized (Vix 1-Month Future)/(Vix 6-Month Future) Jun 08 Jun 09 Jun 10 Jun 11 Jun 12 Jun 13 Jun 14 Jun 15 Jun 16 Jun 17 Jun 18 Sources: WisdomTree, Cboe, Bloomberg, for period 5/31/08 to 6/30/18. Past performance is not indicative of future results. You cannot invest directly in an index. Index performance does not represent actual fund or portfolio performance. A fund or portfolio may differ significantly from the securities included in the index. Index performance assumes reinvestment of dividends but does not reflect any management fees, transaction costs or other expenses that would be incurred by a portfolio or fund, or brokerage commissions on transactions in fund shares. Such fees, expenses and commissions could reduce returns.

17 WisdomTree RESEARCH INVESTMENT CASE FOR PUT WRITING 17 The table below highlights the relative cumulative outperformance of PUT against the S&P 500 during the abovediscussed periods when short-term volatility surged. Figure 15: PUT Index Outperformed When Near Term VIX Futures Spiked # Days Total Outperformance of PUT Index Over S&P 500 Index When Normalized Vix 1 M > Normalized Vix 6 M % Sources: WisdomTree, Cboe, Bloomberg, for period 5/31/08 to 6/30/18. Past performance is not indicative of future results. You cannot invest directly in an index Taking it one step further, I also show the five longest instances in which VIX one-month futures constantly traded higher than VIX six-month futures, and clearly PUT added meaningful outperformance in each of these instances. Figure 16: Longest 5 Periods When VIX Near Term Futures Spiked Period Start Period End Period Length PUT Tr. Index S&P 500 Tr. Index Total PUT Excess Return 5/30/08 7/20/ % -30.0% 13.60% 7/26/11 12/14/ % -8.2% 6.71% 1/26/18 5/9/ % -5.6% 5.10% 12/4/15 3/10/ % -4.3% 1.41% 5/3/10 7/8/ % -10.6% 0.58% Sources: WisdomTree, Cboe, Bloomberg, for period 5/31/08 to 6/30/18 Thus, PUT did what it was designed to do: outperform equities, which were mostly trading negative for those days when volatility had spiked. Two main conclusions can be drawn from the previous two sections: + Higher correlations in equities as a result of drying liquidity are feeding bouts of volatility and making it harder for equity investors to look for temporary shelters in equities during market corrections. + A signal investors could watch for is growth rates in short-term VIX futures relative to medium-term VIX future. Any time the former is accelerating faster than the latter, by design equity investors can partially cushion drawdowns by being allocated to an option selling strategy like PUTW.

18 WisdomTree RESEARCH INVESTMENT CASE FOR PUT WRITING 18 Average Annual Total Returns as of 6/30/18 1 Yr 3 Yr 5Yr 10 Yr As of 6/30/07 Cboe S&P 500 PutWrite Index 5.76% 7.78% 7.98% 6.79% 6.29% Cboe S&P 500 BuyWrite Index 7.30% 7.73% 8.13% 5.73% 4.85% S&P 500 Index 14.42% 11.93% 13.41% 10.17% 7.81% Source: Bloomberg, Cboe, as of 6/30/18. Cboe S&P 500 PutWrite Index inception date: 6/30/07. Past performance is not indicative of future results. You cannot invest directly in an index. CONCLUSION More than a decade ago when WisdomTree launched our fundamentally weighted product suite, we made a decision to stay true to our convictions and launch products based on economic rationale, rather than popular vehicles like capweighted funds. This led to the launch of our dividend-weighted suite in June Fast-forward 10 years and most of our dividend strategies have amassed an impressive track record compared to their peers. When launching PUTW, we decided once again to go against the grain of conventional wisdom and launch a fund that offers investors a strategy that can help reduce the risks in their equity allocations. Short-term investors try to time markets by developing and watching various signals to time risk on or off, while long-term investors go by a simple rule: Time spent in the market is more important than timing the markets. What connects the two investing themes: To grow your portfolio, your asset allocation should be able to survive the cyclicality of markets booms and busts. We believe the put-write strategy offers a compelling investment case for strategic allocation. By collecting option premiums, the strategy can provide an attractive cushion during equity drawdowns, while yielding positive returns in months when equities rally, thus potentially providing an overall enhanced performance across complete market cycles of booms and busts. The WisdomTree CBOE S&P 500 PutWrite Strategy (PUTW) ETF offers access to this compelling strategy in a low-cost ETF format. Consider PUTW to see if it would complement your portfolio.

19 WisdomTree RESEARCH INVESTMENT CASE FOR PUT WRITING 19 Investors should carefully consider the investment objectives, risks, charges and expenses of the Funds before investing. To obtain a prospectus containing this and other important information, please call , or visit WisdomTree.com to view or download a prospectus. Investors should read the prospectus carefully before investing. There are risks associated with investing, including possible loss of principal. The Fund will invest in derivatives, including S&P 500 Index put options ( SPX puts ). Derivative investments can be volatile, and these investments may be less liquid than other securities, and more sensitive to the effects of varied economic conditions. The value of the SPX puts in which the Fund invests is partly based on the volatility used by market participants to price such options (i.e., implied volatility). The options values are partly based on the volatility used by dealers to price such options, so increases in the implied volatility of such options will cause the value of such options to increase, which will result in a corresponding increase in the liabilities of the Fund and a decrease in the Fund s NAV. Options may be subject to volatile swings in price influenced by changes in the value of the underlying instrument. The potential return to the Fund is limited to the amount of option premiums it receives; however, the Fund can potentially lose up to the entire strike price of each option it sells. Due to the investment strategy of the Fund, it may make higher capital gain distributions than other ETFs. Please read the Fund s prospectus for specific details regarding the Fund s risk profile. The Cboe S&P 500 PutWrite Index is a product of S&P Dow Jones Indices LLC or its affiliates ( SPDJI ) and Cboe and has been licensed for use by WisdomTree. Standard & Poor s and S&P are registered trademarks of Standard & Poor s Financial Services LLC ( S&P ); Dow Jones is a registered trademark of Dow Jones Trademarks Holdings LLC ( Dow Jones ). These trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by WisdomTree. Cboe is a trademark of the Chicago Board Options Exchange, Incorporated, and has been licensed for use by SPDJI and WisdomTree. The WisdomTree CBOE S&P 500 PutWrite Strategy Fund is not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates or the Chicago Board Options Exchange, Incorporated, and none of such parties make any representation regarding the advisability of investing in such product(s), nor do they have any liability for any errors, omissions or interruptions of the Cboe S&P 500 PutWrite Index.. S&P 500 Index: A market capitalization-weighted benchmark of 500 stocks selected by the Standard & Poor s Index Committee, designed to represent the performance of the leading industries in the United States economy. Cboe S&P 500 PutWrite Index (PUT): Measures the performance of a hypothetical portfolio that sells S&P 500 Index (SPX) put options against collateralized cash reserves held in a money market account. The PUT strategy is designed to sell a sequence of one-month, at-the-money S&P 500 Index puts and invest cash at one- and three-month Treasury Bill Rates. The number of puts sold varies from month to month but is limited so that the amount held in Treasury Bills can finance the maximum possible loss from final settlement of the SPX puts. Cboe S&P 500 BuyWrite Index (BXM): The Cboe S&P 500 BuyWrite Index is a benchmark index designed to show the hypothetical performance of a portfolio that engages in a buy-write strategy using S&P 500 Index call options. Cboe Volatility Index (VIX): Widely cited measure of volatility, meaning the degree to which an index s actual returns vary from its average returns, synonymous with standard deviation. Higher readings indicate greater potential fear and uncertainty. The VIX uses the average of the expected implied volatility of S&P 500 Index options to determine its volatility measure. WisdomTree Funds are distributed by Foreside Fund Services, LLC, in the U.S. only. WTGM-0911