Shelton’s New SEPI ETF Looks to Disrupt the Derivative Income Landscape

The broader investing community has its eyes fixated on the Federal Reserve for the future of the interest rate curve. But no matter what Powell and company do, clients’ demand for yield will remain strong.

Treasuries and Munis may look better than they did a few years ago, but inflation continues to chip away at real returns with real risk on longer-duration assets. 

In this exclusive Q&A with Shelton Capital’s Barry Martin we look to unpack the emerging class of derivative income strategies, which have been a go-to for many advisors looking for creative yield. Ultimately, as with any shiny new category, the devil is in the details. Structure matters. More from Barry below.

Q: In the first quarter of 2025, a record 233 new ETFs launched, driven by options-based and leveraged funds. The Morningstar Derivative Income category saw rapid growth; in 2018, only 10 ETFs existed in the US with $1B AUM. Now, over 100 ETFs have entered the market, reaching about $100B AUM. This data underscores the competitive distribution landscape and headwinds for new products. How can the newly launched Shelton Equity Premium Income ETF, SEPI, differentiate itself and gain market share?

A: We believe the heightened interest in covered call and derivative income strategies reflects a recent shift in investor philosophy. Just a few years ago, covered call strategies were considered a niche tool, primarily used by institutional investors to hedge risk and generate cash flow.

We believe SEPI stands apart by selling calls on individual stocks rather than relying on synthetic notes or index overlays. The fund draws from the same research and management principles that underpin Shelton’s established Overall Morningstar 5-star Flagship Mutual Fund, EQTIX* and Equity Income Separately Managed Account (SMA).

*EQTIX received an Overall Morningstar Rating of 5 stars among 74 Derivative Income funds, based on risk-adjusted returns, as of 6/30/2025. The fund’s three, five, and ten-year Morningstar ratings were 4 stars, 4 stars, 5 stars respectively among 74, 65, and 33 funds. The ETF is not a mutual fund and may not achieve the same result. Source for Derivative Income Fund Growth.

Q: Talk us through the evolution and proliferation of option-based strategies and why they make sense for today’s market conditions. And what benefits do these products provide investors in down, flat or up markets as well?

A: Today, thanks to the rise of ETFs, and staple solutions like mutual funds, and separately managed accounts, individual investors can now easily access these sophisticated strategies. We’ve seen assets in option-based products soar from $20 billion in 2019 to over $160 billion (CBOE). Advisors are embracing them not just for cash flow generation, but as a way to manage volatility within portfolios. It’s a powerful shift in how we approach yield and risk management. This year with the increased volatility it is an especially good market to sell calls in.

Q: Describe how covered call investing can provide a “third slice” to the traditional 60/40 allocation. How are clients thinking about integrating derivative income solutions into their portfolios?

A: Today, more sophisticated investors are really seeking adequate diversification through alternatives and reliable income streams and cash flow generation. And to simply put it, the 60/40 portfolio that worked in the past just cannot keep up with the rapidly evolving market environment.

Advisors and investors are deploying covered call strategies in a variety of roles: as a core cash flow sleeve within equity portfolios, as a complement to fixed income for diversification, or as a potential volatility dampener within multi-asset strategies. We’ve seen the most consistent adoption from those using it to de-risk traditional equity allocations without abandoning market exposure. For example, in a recent whitepaper, the CBOE indicates that the hypothetical 60/20/20 has outperformed the traditional 60/40 portfolio in 13 of the past 19 years. The alternative portfolio has also done better in recent years, with a higher Sharpe ratio vs. the traditional 60/40 portfolio in each of the past four years.

*^{A 60/20/20 portfolio of 60% stocks (SPX Index), 20% bonds (Bloomberg US Agg Index), (20% to an Options-Based Strategy) Portfolio. The S&P 500, is a stock market index tracking the stock performance of 500 leading companies listed on stock exchanges in the United States. The Bloomberg US Aggregate Index (or “Agg”) is a flagship benchmark for the US investment-grade, fixed-rate, taxable bond market, representing over $50 trillion in securities. The CBOE S&P 500 BuyWrite Index or BMM 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. One cannot invest directly into an index. Click here for the whitepaper and more details on Option Strategies.}

Q: How does selling covered calls on individual stocks differentiate this strategy from some of the other index covered call products out there now?

A: Selling covered calls on individual equities differentiates our strategy from more prevalent index covered call products because each option we write is intentional and tailored to the characteristics of the underlying stock. Unlike index-based products, where call selling is often executed as a program trade without regard for individual stock fundamentals or pricing, our approach considers factors such as dividend yield, implied volatility, and potential price appreciation of each position. This allows us to potentially generate cash flow more strategically, manage risk at the individual stock level, and align the option overlay with our investment objectives, rather than simply following an index’s composition.

Q: What are the inherent risks associated with covered calls, and how do you educate your clients?

A: One of the main risks with covered calls is that you still have full equity exposure. Even though you’re selling calls, you’re still holding stocks like Apple, Microsoft, Amazon, or even more conservative names like AT&T. If the market drops 10%, your equities will likely drop by a similar amount.

Selling covered calls can help offset some of that downside — maybe by 1% to 4% depending on the premium received—but you’re still exposed to the broader market movement. So while the losses might be reduced slightly, you’re still participating in the downside.

Another important risk to consider is opportunity cost. By selling calls, you’re capping your upside. If the stock rallies significantly, you won’t benefit beyond the strike price, which can be a missed opportunity for growth.

Q: How does the Shelton team’s experience in the options space inform the design and risk management approach of SEPI?

A: The ETF leverages Shelton’s nearly two decades of expertise in covered call strategies, bringing a powerful investment to the marketplace for income-oriented investors seeking an actively managed solution in an ETF wrapper. SEPI aims to deliver cash flow based on Shelton Capital Management’s experience with similar strategies**, combining dividends with option premiums generated from writing call options on individual large-cap stocks.

As we continue to pursue innovative vehicle solutions to meet our clients’ needs, we have designed SEPI for investors who want more than a static income fund. By actively managing covered calls on individual equities, we can target meaningful cash flow while maintaining the ability to dynamically adjust to evolving market conditions. This allows us to offer clients a differentiated, outcome-oriented strategy with the ease of an ETF—offering intraday trading, low minimums, and real-time pricing.

**Cash flow is the money generated or available to distribute to shareholders. Distributions may include option premium, ordinary dividends, interest income, capital gains, or return of capital. Distributions may coincide with a decline in NAV. Distribution levels may vary and no minimum distribution amount can be guaranteed.

Q: What specific metrics or outcomes should advisors focus on when evaluating the effectiveness of a covered call strategy like SEPI?

A: When evaluating the effectiveness of a covered call strategy like SEPI, advisors should focus on several key metrics. Total return, which includes dividends, option premiums, and potential appreciation of the underlying stock, should be compared to relevant benchmarks such as the S&P 500 or the BXM Index. Cash flow is another critical measure, with attention to the distribution rate derived from dividends and option premiums. Volatility and risk metrics, including standard deviation and beta, provide insight into the strategy’s ability to reduce downside exposure while capturing partial upside. The effectiveness of the option overlay can be assessed by monitoring the premiums captured and the frequency of shares being called away. Additionally, drawdowns and recovery periods should be analyzed to evaluate downside protection, while upside participation relative to call strikes helps determine the balance between cash flow and long-term capital appreciation. Finally, performance consistency across different market environments—rising, falling, or volatile—is essential for understanding whether the strategy meets its risk-adjusted objectives and provides reliable outcomes for investors.

Q: How do you see the role of derivative income strategies evolving in client portfolios over the next 3–5 years, particularly amid ongoing interest rate uncertainty?

A: Derivative income strategies, such as covered call and option overlay strategies, are likely to play an increasingly important role in client portfolios over the next 3–5 years, particularly given the current and expected volatility in interest rates. As traditional fixed income yields remain relatively low in real terms, and with uncertainty around rate changes, these strategies offer an alternative source of reliable cash flow, which can complement dividends from equities and interest from bonds.

Additionally, derivative strategies provide a risk-management component by generating income that can help dampen portfolio volatility. In environments where equity markets are choppy or rate movements are unpredictable, selling options on high-quality, income-generating stocks can produce incremental cash flow and partially offset downside risk without requiring clients to significantly alter their equity allocation.

We expect that as advisors look to balance income needs, manage portfolio risk, and enhance diversification, derivative income strategies will increasingly be incorporated as core tools for income-oriented and multi-asset portfolios, rather than solely as tactical or supplemental overlays.

Q: What misconceptions do advisors or investors commonly have about options-based ETFs, and how do you address those in conversations?

A: One of the most consistent objections is that covered call ETFs limit capital appreciation. By selling call options, investors forfeit gains beyond the strike price. That’s a fact of life.

And I also think it’s a source of one of the biggest misconceptions, which is how these products should be utilized. These products are not designed for clients who are chasing aggressive growth at all costs. They’re designed for folks who want to prioritize steady cash flow, risk mitigation, and a smooth ride through volatile markets. 

In other words, that “trade-off” is intentional. 

Shelton Capital Management (SCM) is a boutique investment firm that helps investors meet financial goals through tailored investment solutions and human-centric customer service. Founded in 1985, the company provides mutual funds, ETFs, and separately managed accounts to the clients of wealth managers, retirement plans, and individual investors. As of 8/31/25, the firm manages over $6 billion across fixed income portfolios, US equity and international equity strategies, ESG solutions, and equity income products leveraging our expertise in options. Over the decades, we’ve collected awards from established sources such as Morningstar, Lipper, Forbes Advisor, and Pension & Investments. The company continues to add key employee talent and expand their institutional expertise. Shelton is headquartered in Denver, Colorado with additional offices in San Francisco. For more information, visit www.sheltoncap.com.

Important Information

SCM Trust has filed and declared effective a registration statement with the US Securities and Exchange Commission for the Shelton Equity Premium Income ETF, which is now listed and trading on the NYSE Arca under the ticker symbol SEPI.

The Shelton Equity Premium Income ETF is distributed by Paralel Distributors LLC, Member Firm. Shelton Capital Management is not affiliated with Paralel Distributors LLC.

As of September 8^th, the launch date of the ETF – SEPI had a 5.07% holding allocation to Apple, 4.2% holding allocation to Amazon, 3.91% holding allocation to Microsoft. No allocation to AT&T. Holdings Subject to Change. 

SEPI Fund Disclosures

An investor should consider the investment objectives, risks, charges, and expenses of the Fund carefully before investing. To obtain a prospectus containing this and other information, please call (800) 955-9988 or visit www.sheltoncap.com/sepi. Read the prospectus carefully before investing.

Exchange Traded Funds (“ETFs”) are subject to the possible loss of principal. The value of the ETFs will fluctuate with the value of the underlying securities. ETF Shares may trade at prices above or below NAV. Liquidity isn’t guaranteed, and trading may be halted due to market-wide or security-specific events, delisting, or exchange actions.

Diversification does not eliminate the risk of experiencing investment loss.

The Fund is new with a limited operating history.

The value of the Fund’s equity holdings may decline, sometimes unpredictably, due to broader economic, political, or market conditions not specific to individual companies. Because the Fund is primarily invested in US stocks, its value will fluctuate with overall market movements and may decline during market downturns, potentially resulting in losses. The Fund’s use of call and put options can limit upside potential and increase costs, particularly if market movements render the options ineffective or result in expired contracts without value.

Investments in derivatives may be riskier than other types of investments. They may be more sensitive to changes in economic or market conditions than other types of investments. Many derivatives create leverage, which could lead to greater volatility and losses that significantly exceed the original investment. Positions in equity options can reduce equity market risk, but can limit the opportunity to profit from an increase in the market value of stocks in exchange for upfront cash as the time of selling the call option. Unusual market conditions or the lack of a ready market for any particular option at a specific time may reduce the effectiveness of option strategies and could result in losses.

© 2025 Morningstar, Inc. All rights reserved. The information contained herein relating to Morningstar: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.

The Morningstar Rating™ for funds, or “star rating”, is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product’s monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The Morningstar Rating does not include any adjustment for sales loads. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating metrics. The weights are: 100% three-year rating for 36-59 months of total returns, 60% five-year rating/40% three-year rating for 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods.

Sharpe Ratio: A measure of how much excess return an investment generates per unit of total risk (volatility).
Standard Deviation: A statistical measure of the variability or volatility of an investment’s returns.
Beta: A measure of an investment’s sensitivity to movements in the overall market.

Dividend yield is a financial ratio, expressed as a percentage, that measures the annual dividends a company pays out per share relative to its current stock price.

Cash flow is the money generated or available to distribute to shareholders. Distributions may include option premium, ordinary dividends, interest income, capital gains, or return of capital. Distributions may coincide with a decline in NAV. Distribution levels may vary and no minimum distribution amount can be guaranteed.

INVESTMENTS ARE NOT FDIC INSURED OR BANK GUARANTEED AND MAY LOSE VALUE.

SEPI29