Covered Call ETF Generates Income, New Highs | ETF Trends

U.S. equity markets have been lethargic in recent months. As a result, investors have turned alternative investment strategies like covered call exchange traded funds to diversify their portfolios.

The Horizons S&P 500 Covered Call ETF (NYSEArca: HSPX), which employs a covered call strategy on the S&P 500, was up 0.1% Wednesday, touching an all-time high. HSXP is up 3.9% year-to-date.

The covered call strategy is a good way to generate cash in a muted market environment. By utilizing a covered call strategy, an investor who owns a stock sells, or “writes,” call options and collects the income from the premiums paid by the buyer of the option.

Specifically, HSPX’s 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.

The ETF issues a monthly dividend payout, with a recent distribution yield of 2.11%. [ETFs for Monthly Dividend Hunters]

While the performance of HSPX, and those of its rivals, has lagged the S&P 500 during the bull market last year, covered call ETFs can prove durable in range-bound or down-trending markets.