An Income ETF Strategy for an Aging Bull Equity Market

The actively managed AdvisorShares STAR Global Buy-Write ETF (NYSEArca: VEGA) employs a covered call strategy through global stocks ETFs, including emerging markets and developed EAFE countries, along with some international bond exposure.

Lastly, the recently launched actively managed Amplify YieldShares CWP Dividend & Option Income ETF (BATS: DIVO) also employs an existing strategy managed by Capital Wealth Planning that is made up of mega cap, high quality, blue chip stocks designed to deliver income through selling short-term covered calls against 30% to 60% of underlying holdings to generate additional income.

Covered-call options allow an investor to hold a long position in an asset while simultaneously writing, or selling, call options on the same asset. Traders would typically employ a covered-call strategy when they have a neutral view of the markets over the short-term and just gather income from the option premium. While these buy-write ETFs may not produce any phenomenal price returns compared to the broader equities markets, their underlying option strategy helped them generate outsized yields.

For instance, HSPX gained 19.4% over the past year while the S&P 500 rose 23.3%. However, HSPX has also generated 3.24% 12-month yield, compared to the S&P 500’s dividend yield of just over 2.0%

If the markets stay within range or trade in a more sideways fashion, investors would use the buy-write strategy to generate a premium on the option. If shares fall, the option expires worthless and one still keeps the premiums on the options. However, potential investors should keep in mind that the strategy can cap the upside of a continued rally. The trader keeps the premium generated but any gains beyond the strike price will not be realized. Consequently, in a stock market rally, the buy-write strategy has underperformed the equities market.