An Alternative ETF Strategy for Heightened Volatility

The recent equity market correction shows that the aging bull market rally is susceptible to sudden bouts of extreme volatility, and with a rising rate environment and surprise moves out of the Trump administration, investors may expect more oscillations ahead.

Consequently, investors who are wary of the potential risks may turn exchange traded funds that track buy-write or covered call strategies to generate attractive yields if markets slowdown in the year ahead.

“Covered call strategies can potentially benefit an investor during periods of heightened volatility,” Garrett Paolella, Managing Director at Horizons ETFs US, said in a note.

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.