VistaShares

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VistaShares delivers innovative Liquid Alternative investment solutions for today's investors. VistaShares ETFs are actively managed by industry and investment experts, offering a number of distinct strategies. Supercycle® Growth Equity ETFs seek exposure to technology-driven economic Supercycles® that the adviser believes may offer long-term growth potential. Target 15® option-income ETFs seek to generate monthly income while complementing a core equity portfolio. Income is not guaranteed and will vary, and the Target 15® name refers to the strategy's objective rather than a guaranteed or promised return. Investing involves risk, including possible loss of principal. There is no guarantee that any investment objective will be achieved, and past performance does not guarantee future results.

How a fund distribution works

A fund distribution is a payment from the fund to everyone who holds it on the record date. The ex-date comes first: anyone who buys on or after it does not receive that payment. On the ex-date the fund's price falls by roughly the amount being paid, because that cash is leaving the fund. Nothing has been gained or lost by the holder on that day; value has moved from inside the fund to the holder's account.

That is why a large distribution is not, on its own, a sign of a good result. A fund can pay out more than it earns for a while, and the difference shows up as a slow decline in its price. A fund can also earn more than it pays and let the rest build up. Only total return, which counts the payments and the change in price together, tells you which is happening.

Monthly payment schedules are common among income funds because they suit people living on the income. The schedule says how often a payment arrives. It says nothing about where the money came from or whether the pace can be kept up, and those are separate questions with separate answers.

A useful habit is to read a fund's price and its payments over the same stretch of time, side by side, before reading anything written about either.

Over long stretches the two pieces have to reconcile. Payments that run ahead of what a fund earns are drawn from its assets, and a smaller pool of assets has less to earn from, which is the slow arithmetic behind a price that drifts lower year after year while the payments look unchanged.

The same reasoning applies when comparing two income funds. The one with the larger payment is not necessarily the one leaving its holders better off, and the only way to tell is to read the payments and the price over the same stretch of time.

How option income funds produce their payments

A growing group of income funds produce their payments by selling options, most often covered calls, on the stocks or index they hold. Selling a call brings in a premium immediately and gives someone else the right to buy the holding at a set price. If the price rises past that level, the fund gives up the gain above it. The premium is paid in exchange for that upside.

This makes the payment and the market linked in a specific way. When markets are volatile, option premiums tend to be larger and the payments can rise. When markets climb steadily, the fund keeps the premium but misses much of the climb. Over long stretches, the strategy tends to look smoother than the market and to lag it in strong years.

Option premium can be paid out as a distribution, and depending on how the options are structured and taxed, a payment may be classified as income, gains or return of capital. The notices that accompany each payment, and the year-end tax form, say which.

The useful comparison for a fund of this kind is not its payment rate against another fund's, but its total return against the holdings it writes options on, over periods that include both calm markets and rough ones.

There is also the question of what happens to the holdings over time. A fund that sells calls on a holding that keeps rising will see that holding called away or rolled to higher prices, and how the fund manages that process shapes both its payments and its price.

It also helps to know which options the fund sells and how often. Selling options close to the current price brings in more premium and gives up more upside; selling them further away does the reverse. That choice shapes the fund more than the label does.

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If a message from vistasharesportfolio.com reached you and you want to confirm it came from us, write to info@vistashares.com or call (844) 875-2288.

The subject of this address

This address writes about distributions: the regular payments income funds make to their holders, and the mechanics behind them. Ex-dates, record dates, the drop in a fund's price on the day it pays, and the notices that say what a payment was made of. None of it is complicated, and most of it is skipped.

Much of the writing from here is about one distinction, between what a fund pays and what a fund earns. They are related, and over short stretches they can differ a great deal.

That difference is the whole story of an income fund, and it is rarely the part anyone advertises.