Grayscale Applies for Zcash (ZEC) 'Bi-Weekly Dividend' ETF...Are There No Covered Call Yield Traps?

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Grayscale, the world's largest virtual asset manager, is pushing for the launch of a Zcash derivative exchange-traded fund (ETF) that will distribute dividends to investors every two weeks.

According to crypto media outlet BeInCrypto on September 26 (local time), Grayscale has submitted a registration application for ‘The ZCSH High Income ETF’ to the U.S. Securities and Exchange Commission (SEC). This fund adopts a structure that generates profits by trading options on the existing spot fund, Zcash ETF (ZCSH), instead of directly incorporating the privacy-focused cryptocurrency Zcash (ZEC). It is expected to officially come into effect in early December, 75 days after regulatory approval.

The fund is designed to replicate the price movements of ZCSH spot by combining buying call options and selling put options, and to pay bi-weekly distributions from the premiums received by selling short-term call options with maturities of less than one month. A minimum of 80% of net assets must be allocated to options related to Zcash Exchange Traded Products (ETPs). However, the document states, “The term 'high income' does not guarantee a fixed rate of return,” and “a portion of the distributions may be in the form of a return of capital.”

Limited upside potential and exposure to downside risk are cited as major investment risks. Due to the nature of the covered call strategy, where call options are sold, even if the price of Zcash skyrockets above the strike price, the fund must forgo additional capital gains, but it remains fully exposed to losses if prices fall. Furthermore, the ZCSH options market launched on September 8 and has low maturity, and the potential for conflicts of interest arising from the fund advisor's affiliate receiving a 2.50% management fee as a sponsor were also cited as risk factors.

The robust capital inflows into existing spot products are analyzed as the background for planning new dividend products. Since its conversion from a trust launched in 2017, ZCSH has recorded cumulative inflows of $271 million as of September 18, increasing its assets under management to $914.5 million. It is evaluated that attempts to financialize high-dividend products using option premiums are accelerating in the altcoin sector, following Bitcoin (Bitcoin, BTC) covered call products.

[Article Key Summary]

-Grayscale has submitted an application for the ZCSH High Income ETF, which pays dividends every two weeks from option premiums.

-By generating income through selling call options, the upside potential of Zcash is limited, while the risk of price decline must be fully borne.

-Driven by the success of the Zcash spot fund, which has achieved $914.5 million in assets under management, the expansion of derivative dividend products is accelerating.

*Disclaimer: This article is for investment reference only and we are not responsible for any investment losses based on it. The content should be interpreted for informational purposes only.*