A New Covered Call ETF Comes to Town

January 9th at 9:30am by Tom Lydon

In another sign that 2014 could be on par with 2013 in terms of income-oriented exchange traded fund introductions, First Trust has rolled out the First Trust Low Beta Income ETF (NasdaqGS: FTLB).

FTLB is an actively managed spin on the covered call concept, which has seen an increasing number of new ETF entrants in recent months. ETFs that use the covered call option strategy can play a role in the income-generating effort within some clients’ portfolios. [Unique Yield Sources Among ETFs]

Like some of its covered call ETF rivals, FTLB will focus primarily on large-cap stocks. The market value of the option strategy may be up to 20% of the fund’s overall net asset value, according to First Trust.

One downfall of covered call ETFs that became apparent during last year’s bull market, though it is one some issuers readily acknowledge, is that during overt bull markets, these funds lag broader benchmarks. However, covered call ETFs have the potential to outperform broader indices during sideways and bear markets. [Boosting Portfolio Income With Covered Call ETFs]

To buffer against potential downside in U.S. stocks, FTLB can use a portion of the income it receives from selling calls on its holdings to purchase S&P 500 puts.

FTLB’s top-10 holdings include Dow components Johnson & Johnson (NYSE: JNJ), General Electric (NYSE: GE), AT&T (NYSE: T) and Pfizer (NYSE: PFE) as well as Altria (NYSE: MO), ConocoPhillips (NYSE: COP) and Priceline (NasdaqGM: PCLN).

Rival covered call ETFs include the Horizons S&P 500 Covered Call ETF (NYSEArca: HSPX), Horizons Financial Select Sector Covered Call ETF (NYSEArca: HFIN) and the Recon Capital NASDAQ 100 Covered Call ETF (NasdaqGS: QYLD).

ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of GE and Pfizer.

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.