ETFs for Added Income and Downside Protection

Another one of the ETFs we highlighted was the Horizons S&P 500 Covered Call ETF (NYSEArca: HSPX), which Cunningham said “gives investors the best of both worlds, meaningful market exposure to the S&P 500 and increased income from a covered call strategy.”

“HSPX is the first ETF in the United States that writes out-of-the-money calls on all of the underlying stocks of an index – which in this case is the S&P 500, the most widely followed large-cap stock index in the world,” added Cunningham.

HSPX, which launched in late June, charges 0.65% per year. The fund usually sells one-month calls with a strike price generally 0.75 standard deviations above the underlying stock’s price on roll day. As Horizon’s notes, an ETF like HSPX is designed to outperform in bear and range-bound markets.

“Thus far the performance of HSPX has been great. The last few months have been a terrible time to be writing covered calls, with month after month of higher market returns. These are the worst-case market conditions for a buy-write strategy, and even still HSPX has delivered nearly 80% of the return of the S&P 500. (It has generated a 7.77% return since inception). When the market goes south or flat, we’ll likely be outperforming the market and generating an attractive income for investors,” said Cunningham.