When stocks move up in near straight-line fashion, covered call exchange traded funds are nice income generators, but these ETFs will also lag the broader market’s returns.
It is during volatile market stretches that the utility of covered call ETFs shines through. That has been the case in recent weeks as investors have eagerly departed momentum sectors in favor of less volatile fare.
The idea behind covered call ETFs “is that over the long term, an investor will earn stock-like returns with fewer ups and downs. The chief drawback is that this strategy caps gains in the kind of big stock rally seen during 2013, when the S&P 500 rose 30%,” reports Tom Lauricella for the Wall Street Journal.
Year-to-date, the S&P 500 is up just 0.7% and the benchmark U.S. index yields a paltry 1.9%. The Horizons S&P 500 Covered Call ETF (NYSEArca: HSPX) is higher by 1.2%. HSPX tracks the S&P 500 Stock Covered Call Index, so its equity positions and weights mirror those found in the S&P 500.
Additionally, Horizons ETF offers a more tactical approach with the Horizons Financial Select Sector Covered Call ETF (NYSEArca: HFIN), which tracks the S&P Financial Select Sector Covered Call Index.
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. [Boosting Income With Covered Call ETFs]