Horizons ETFs, a new player in the U.S. exchange traded fund scene, is expanding its line of income generating strategies with a financial sector-focused covered call fund.
The new ETF tries to reflect the performance of the S&P 500 Financial Select Sector Stock Covered Call Index, which sells or "writes" covered call options on up to 100% of securities in the portfolio with a goal of generating monthly income.
By utilizing a covered call strategy, an investor who owns a stock sells call options, and collects the income from the premiums paid by the buyer of the option. Specifically, the underlying index utilizes an "out-of-the-money" covered call strategy. The out-of-the-money call option will take a strike price higher than the current market price of the underlying security.
Covered call writing is a method for generating additional income from a stock portfolio beyond what would otherwise be provided on its own from dividends or other distributions. It has also been used to enhance yield while reducing volatility.
"U.S. stocks have been a great place to be invested over the last two years," Howard Atkinson, Managing Director of Horizons USA, said in the press release. "Some Investors may feel that now is a good time to be looking at more defensive strategies to preserve some of their returns. A covered call strategy can keep you invested in equities and potentially lower the volatility of returns of those equities while attempting to generate additional income, which can mitigate losses, during certain market conditions."
The covered call strategy has outperformed during bear markets, range-bound markets and slightly bullish conditions. However, during strong bull rallies, the covered call strategy has historically fallen behind as the underlying securities would surge through their strike prices.
The S&P 500 financial sector has been outperforming the broader S&P 500 benchmark. Month-to-date, financial stocks gained 2.7%, whereas the S&P 500 is up 2.4%. Year-to-date, the S&P 500 financials index increased 28.5% and the S&P 500 index rose 26.1%.
Max Chen contributed to this article.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.