When the Dow is Whipsawing, Consider This Covered Call ETF

The Dow Jones Industrial Average has been whipsawing from positive to negative, giving investors more than enough volatility in 2022. The CBOE DJIA Volatility Index is up over 20% for the year, speaking to that volatility.

Recently, earnings reports from retailers suggest that consumers won’t be able to outrun inflation for very long. Despite rising consumer prices, wage inflation has been able to sustain purchasing power, but it may not keep holding up.

“Earnings reports from some of America’s biggest retailers in recent days have added to concern that the highest rate of inflation in four decades is catching up with U.S. consumers and pitching the economy toward a recession,” a Wall Street Journal report noted.

“Investors were already grappling with the end of an era of loose monetary policy that stoked big gains for stocks and other riskier assets,” the report added further. “The combination of factors has recently fed into steep losses for stocks and some corporate bonds, and many investors expect the volatility to continue.”

^VXD Chart

^VXD data by YCharts

Muting the Volatility With Covered Calls

One way to play the Dow and to help mute the volatility is to get strategic with exchange-traded funds (ETFs) that implement a covered call strategy. One such fund is the Global X Dow 30 Covered Call ETF (DJIA).

DJIA follows a “covered call” or “buy-write” strategy that allows the fund to purchase stocks in the Dow while writing corresponding call options on the same index. It provides a built-in hedging component within the ETF itself, saving investors time from opening a separate position to hedge.

The funds seeks to track the DJIA Cboe BuyWrite v2 Index, which measures the performance of a covered call strategy that holds a theoretical portfolio of the underlying stocks of the Dow Jones Industrial Average and writes a succession of ATM covered call options on the reference index. The underlying index specifically reflects the performance of the component securities of the reference index, combined with written ATM call options corresponding to the value of the portfolio of stocks in the reference index.

An income component also adds to the attractiveness of the fund. It features monthly distributions with a 30-day SEC yield of 1.41%.

Features of DJIA:

  • High Income Potential: DJIA seeks to generate income through covered call writing, which historically produces higher yields in periods of volatility.
  • Monthly Distributions: DJIA expects to make distributions on a monthly basis.
  • Efficient Options Execution: DJIA writes call options on the Dow Jones Industrial Average, saving investors the time and potential expense of doing so individually.

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