New ETFs On The Block: Horizons S&P 500 Covered Call ETF (HSPX)

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139868600Markets turned volatile across the globe after the Federal Reserve indicated it may slow down its asset purchase program later this year. A tapering of QE3 is likely to be followed by a hike in interest rates, which in turn will put downward pressure on fixed-income portfolios. Investors are naturally worried about greater volatility and are seeking stability while protecting their income.

Horizon’s ETFs Management Inc., a Toronto, Canada-based ETF issuer has launched its first US-listed exchange-traded fund that attempts to generate additional monthly income while reducing volatility. The firm manages/sponsors funds in Canada, Australia, South Korea and Hong Kong, with total ETF assets under management exceeding $7 billion.

The Horizon’s S&P 500 Covered Call ETF (HSPX) will track the S&P 500 Stock Covered Call Index, a benchmark that gives investors exposure to covered-call strategy. In a covered call strategy an investor who owns a stock sells out-of-money call options on the same stock, and collects the premium paid by the buyer of the stock. Such a strategy reduces volatility and generates higher returns for investors compared to a plain-vanilla long-only equity portfolio.

Research by Horizon’s USA shows out-of-money covered-call strategies like HSPX’s have historically outperformed the returns of their underlying securities in bear markets, range-bound markets and modestly bullish markets.

However, during strong bull markets, covered-call strategies tend to lag, though investors still manage to earn some capital appreciation on the stock positions, along with dividends and option premiums from the covered call. The tracking index sets the strike-price based on the underlying stock’s implied volatility while selling the call options.

The greater the volatility the higher the strike-price. Research by Horizons indicate such a methodology can offer an optimal balance between generating monthly income while preserving the upside potential of the underlying stocks.

The fund has an expense ratio of 0.65 percent.

Disclosure: No holdings

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