Boosting Portfolio Income With Covered Call ETFs

December 3rd at 10:30am by Tom Lydon

With interest rates expected to remain low for the foreseeable future, advisors and their clients are still scrambling for conservative ways of generating income.

Exchange traded funds that use the covered call option strategy can play a role in the income-generating effort within some clients’ portfolios. Still, some advisors are not yet taking full advantage of covered call ETFs.

Advisors “who use ETFs are often indexing enthusiasts who value simplicity over mastering a niche practice that takes a long time to understand and limits upside potential during bull markets. Diversified ETFs are generally less volatile than individual securities, so their premiums aren’t as rich,” writes Marla Brill for Financial Advisor.

Financial Advisor goes on to note that many advisors do not even an opinion one way or the other regarding cover call ETFs, but issuers are looking to change that. The Horizons S&P 500 Covered Call ETF (NYSEArca: HSPX), which tracks the S&P 500 Stock Covered Call Index, is one of the newer entrants in the covered call ETF space. [Unique ETF Sources of Yield]

HSPX is almost six months old and has returned 9% since its June debut. By utilizing 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. Specifically, the underlying index utilizes an “out-of-the-money” covered call strategy. The out-of-the-money call option will take a strike price higher than the current market price of the underlying security.

While the performance of HSPX, and those of its rivals, has lagged the S&P 500 during this over bull market, covered call ETFs can prove durable in range-bound or down-trending markets. In terms of appearance relative to the S&P 500, HSPX looks similar with Apple (NasdaqGM: AAPL) and Exxon Mobil (NYSE: XOM) as its top two holdings. The fund’s sector allocation is also comparable to that of the S&P 500.

HSPX’s rivals include the Powershares S&P 500 BuyWrite Portfolio (NYSEArca: PBP), which has almost $194 million in assets under management and a trailing 12-month yield of 3.51%. Other covered call ETFs include the AdvisorShares STAR Global Buy-Write ETF (NYSEArca: VEGA) and the iPath CBOE S&P 500 BuyWrite ETN (NYSEArca: BWV).

Advisors looking to take a more tactical approach to covered call ETFs can consider the Horizons Financial Select Sector Covered Call ETF (NYSEArca: HFIN). HFIN, which is just a few weeks old, tracks the S&P Financial Select Sector Covered Call Index.

Top holdings in HFIN include J.P. Morgan Chase (NYSE: JPM), Wells Fargo (NYSE: WFC) and Berkshire Hathaway (NYSE: BRK-B). [Generate Income With a Financial Services Covered Call ETF]

Horizons S&P 500 Covered Call ETF

 

 

ETF Trends editorial team contributed to this post.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.