Income or Downside Protection? Comparing Fidelity’s Options-Based ETFs

Options-based ETFs give investors flexible ways to help build equity portfolios, generate extra income, and hedge against market downturns. For financial advisors, these strategies offer a compelling path beyond the usual mix of stocks and bonds.Key Takeaways Options-based ETFs offer different approaches to equity risk: Depending on their structure, these funds may seek to generate income, moderate losses, or provide downside protection. FYEE focuses on income potential: Selling call options generates premiums but can limit participation in market gains beyond the options’ strike prices. FBUF combines income generation and downside hedging: Buying puts and selling calls can help offset some protection costs, but losses may still occur and upside participation may be limited. FHEQ uses put options for downside protection: By purchasing puts without selling calls as part of its hedging strategy, the fund retains potential equity upside, while option premiums can weigh on returns. The Fidelity Yield Enhanced Equity ETF (FYEE A), Fidelity Dynamic Buffered Equity ETF (FBUF ), and Fidelity Hedged Equity ETF (FHEQ ) take different approaches to using options within an equity portfolio. Understanding how these strategies work, and the trade-offs involved, can help advisors assess where they may fit within a broader portfolio.FYEE: Income Generation Via Call Writing FYEE is designed for investors seeking income potential alongside exposure to large-cap U.S. equities. The fund holds an equity portfolio and uses call options linked to the S&P 500 to generate option premiums. These premiums can contribute to the fund’s income, although distributions are not guaranteed and may vary. By generally selling call options with strike prices above the market level, the strategy retains some potential participation in rising markets. However, if the index rises beyond those strike prices, the options can limit the fund’s gains relative to an otherwise similar portfolio without the call-writing strategy. FYEE may be worth considering for investors seeking income from an equity-oriented strategy. The key trade-off is whether the potential income is consistent with their objectives and worth the possibility of giving up some market gains.FBUF: Dynamic Buffer Protection & Options HedgingFBUF takes a different approach by combining equity exposure with options designed to help manage downside risk. The strategy uses put options, which can increase in value as the underlying market declines, and sells call options to collect premiums that may offset some of the cost of purchasing protection. The outcome depends on factors such as market movements, option pricing, and the structure of the options used. This approach involves trade-offs. Put options may help cushion losses under certain market conditions, but they do not eliminate downside risk. Meanwhile, selling calls can limit participation in strong market rallies. FBUF may be relevant for investors who want to maintain equity exposure while seeking to moderate some downside risk. Advisors should consider how the fund’s protection strategy works across different market environments and whether its upside limitations align with investor objectives. See More: How Derivative ETFs Are Reshaping the Search for YieldFHEQ: Downside Put Protection With Uncapped Upside FHEQ takes a more direct hedging approach by purchasing put options to help mitigate potential losses in its equity portfolio. A put option gives the holder the right to sell an underlying security or exposure at a specified price before or at expiration, depending on the contract. If the market declines sufficiently, the put may increase in value and help offset some losses in the underlying portfolio. The amount of protection depends on the options’ strike prices, expirations, and coverage. Unlike a strategy that sells calls to help finance protection, FHEQ’s described approach does not impose the same options-related cap on potential equity gains. However, buying put options involves a cost. If markets rise or remain relatively stable, those premiums may weigh on returns without providing an offsetting benefit from a market decline. FHEQ may appeal to investors seeking equity exposure alongside an explicit options-based hedge. The central consideration is whether the potential value of downside protection justifies its cost over time.How FYEE, FBUF & FHEQ May Fit Into a PortfolioFYEE, FBUF, and FHEQ illustrate how different options strategies can address different portfolio objectives. For financial advisors, the starting point is identifying the objective: generating income, managing equity volatility, or adding a hedge against market declines. The appropriate strategy will depend on the investor’s time horizon, risk tolerance, income needs, and willingness to accept the associated trade-offs. For more news, information, and analysis, visit the ETF Investing Content Hub. Fidelity Investments® is an independent company unaffiliated with VettaFi LLC (“VettaFi”). These articles do not form any kind of legal partnership, agency affiliation, or similar relationship between VettaFi and Fidelity Investments, nor is such a relationship created or implied by the articles herein. VettaFi LLC is the author and owner of these articles. 1287859.1.0