The U.S. markets are climbing again on growing confidence that
the Fed's monetary stimulus tapering is not likely anytime soon.
But this has troubled the financial sector which had benefited from
a steeper yield curve as of late.
An environment of a tight yield spread is by no means good news for
financial sector as it will lead to increased volatility in the
space. The sector has been seeing rough trading over the past
several sessions. Investors are now looking for safety and
stability of their income in this space (read:
Financial ETFs Tumble on Citigroup Warning
For those investors, Horizons launched
Horizons S&P Financial Select Sector Covered Call ETF-
that seeks to limit downside risk in unfavorable market conditions
by offering exposure to a covered call strategy.
A covered call is an option strategy whereby an investor holds a
long position in an asset and sells or writes call options on that
same asset in an attempt to generate higher income from it.
HFIN in Focus
This new ETF seeks to match the performance of the S&P 500
Financial Select Sector Stock Covered Call Index. Basically, the
product will hold a long position in all the stocks of the S&P
Financial Select Sector Index in substantially equal weights while
at the same time, will short (write) call options on
option-eligible stocks in the same index.
With this process, the fund aims to generate additional monthly
income from the call option (premiums collected) simultaneously
holding the individual stocks in the S&P Financial Select
Sector Index in case of rising markets.
Investors should note that the product will charge an annual fee of
70 bps, which is significantly lower than many products in the
long/short strategy ETF space (see:
all the Long/Short ETFs here
How does in fit in a portfolio?
This covered call strategy ETF could be an intriguing and novel
choice for investors looking for upside potential in the financial
sector with lower risk (read:
Time to Hedge Your Risk with These 3 ETFs
This is because the strategy limits the downside risk of selling
call options and at the same time enables an investor to enjoy some
capital gains if the underlying asset rallies.
The new product could deliver higher yields compared to simple
financial products while reduce volatility of returns during
various market cycles. It utilizes an innovative strategy that
writes or sells out-of-the-money calls for the underlying asset.
The money received by selling the call options can serve as yield
for putting up this security as collateral.
ETF Competition and Bottom Line
Since this is the first ETF targeting the financial sector with a
covered call strategy, it does not have a direct competitor (read:
Why IAI Is a Great Financial ETF
However, it can compete closely with the two covered call products
- Barclays iPath S&P 500 BuyWrite Index ETN (
) and PowerShares S&P 500 BuyWrite Portfolio ETF (
) - targeting the broad market. Currently, both cost investors 75
bps per year but PBP is far more popular with more than $198
million in AUM.
Additionally, Horizons has a covered call ETF of its own targeting
the broad market, the S
&P 500 Covered Call ETF (
. This fund charges investors 65 basis points a year in fees, while
it has amassed roughly $20 million in assets in its short time on
Given this, it is hard to say how the new Horizons ETF will do in
terms of investor interest. If the financial market continues to
flounder, investors could definitely see some big inflows from
concerned investors who are seeking lower risk alternatives with
higher yields, though only time will tell if the market can support
another covered call fund.
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IPATH-CBOE SP5 (BWV): ETF Research Reports
HORZN-SP5 CV CL (HSPX): ETF Research Reports
PWRSH-SP5 BUYWR (PBP): ETF Research Reports
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