Horizons ETFs Group on Monday introduced its first exchange traded fund listed in the U.S., an ETF geared to replicate a specialized covered-call strategy.
Horizons S&P 500 Covered Call ETF (NYSEArca: HSPX) is designed to generate excess income while also limiting volatility relative to the index.
In a covered call strategy, an investor who owns a stock sells call options, and collects the income from the premiums paid by the buyer of the option.
“Generally, a covered call strategy will deliver the market return of a stock up to its strike price, plus any dividends and the additional income received from call premiums,” according to background materials on the ETF from Horizons.
HSPX is the first covered call ETF strategy that writes on individual S&P 500 stocks. The fund “answers a growing need for maintaining regular income streams in a persistent low-interest-rate and shrinking-yield environment,” said Howard Atkinson, Managing Director of Horizons USA.
“Historically, during bear markets, range-bound markets and modest bull markets, covered call strategies generally have outperformed their underlying securities,” according to Horizons.
“During strong bull markets, when the underlying securities may frequently rise through their strike prices, covered call strategies historically have tended to lag,” it added. “During these strong bull markets, however, investors would still generally have earned some capital appreciation on the stock positions, together with dividends and the option premiums from writing the covered calls.”
Covered call strategies are popular with registered investment advisors and investors looking to boost income in the equity side of their portfolios.
HSPX looks like it will compete with PowerShares S&P 500 BuyWrite Portfolio (NYSEArca: PBP) and similar ETFs. PBP holds assets of about $190 million. [ETF Chart of the Day: Buy-Write Strategies]
However, HSPX is unique in that it will sell out-of-the-money call options on individual stocks, rather than the entire S&P 500 Index. The new ETF has an expense ratio of 0.65%, lower than existing buy-write funds.
The tracking index is designed by S&P Dow Jones Indices.
When selling call options on individual stocks, the index sets strike prices based on the stock’s implied volatility. The higher the volatility, the higher the strike price.
“This particular approach to writing covered calls on a portfolio of stocks is supported by a significant body of academic literature that suggests it can potentially offer an optimal balance between generating attractive monthly income while preserving more of the upside potential of the underlying stocks,” according to Horizons.
Horizons ETF Group manages sponsors products in Canada, Korea, Hong Kong, Australia, and now in the U.S.
Its total ETF assets stand at about $7 billion spread over 180 products worldwide.