An Income ETF Strategy for an Aging Bull Equity Market

Equities benchmarks have hit record highs, with the Dow Jones Industrial Average recently breaking above 20,000 for the first time, as we head toward the ninth year of the bull market rally. Investors who are skeptical about how much further we can go from here can look to exchange traded funds that track buy-write or covered call strategies to generate attractive yields if markets slowdown in the year ahead.

Market valuations have continued to push higher, and many traders are waiting on corporate earnings to validate the high prices on many stocks after the recent President Donald Trump-induced rally helped push benchmarks to records. However, after a multi-year rally, investors should not expect stocks to continue strengthening at the breakneck speeds of yesteryear.

Moreover, most of the recent strength in the equities rally was due to the so-called Trump bump as traders fueled price gains on expectations that president Trump will enact expansionary policies, like tax cuts, deregulation and increased fiscal spending. The new administration, though, has not provided a lot of details on these promises, and some investors have kept expectations in check.

Consequently, with the stock market rally growing long in the tooth, investors should turn to alternative investments like a buy-write or covered calls that could be an effective investment strategy in a more sideways trending market, which allow us to capture some upside while generating income through the option premium.

There are a few covered call or buy-write ETF options available. For instance, the Powershares S&P 500 BuyWrite Portfolio (NYSEArca: PBP) is the largest buy-write ETF based off the S&P 500, and the Horizons S&P 500 Covered Call ETF (NYSEArca: HSPX) also employs a covered call strategy on the S&P 500. The iPath CBOE S&P 500 BuyWrite ETN (NYSEArca: BWV) utilizes covered calls on the S&P 500 but it comes in an exchange traded note wrapper.

The Recon Capital NASDAQ-100 Covered Call ETF (NasdaqGM: QYLD) provides a covered-call strategy that targets Nasdaq-100 securities.