New Covered Calls, Closed-End Funds And Colombia ETFs

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Toronto-based Horizons ETFs Management launched its first ETF in the U.S. Monday. Horizons S&P 500Covered Call ETF ( HSPX ) will hold stocks in the S&P 500 and sell calls on the stocks it holds, known as writing covered call options.

Selling covered calls is similar to collecting rent on a stock and is best used during a sideways or weakly uptrending market. Should the stock hit the given strike price, the shares will be "called" away. If it doesn't, the call seller gets to keep the stock and pocket the premium.

The major risk is that a call seller could miss out on gains if the shares get called away and the stock keeps on rising. So the strategy would underperform in a strong bull market. Also, premium income might not make up for stock losses in a sharply declining market.

HSPX will compete withPowerShares S&P 500 BuyWrite Portfolio ETF ( PBP ), which has $198 million in assets. The major difference is that HSPX will sell calls on the individual stocks while PBP sells calls on the entire S&P 500 index.

In theory, the strategy sounds promising for investors seeking dividend income. But in practice, the strategy not only costs more but lags the market tremendously.

PBP yields less than 1% but charges 0.75% of assets for expenses, while the plain vanilla SPDR S&P 500 ( SPY ) yields 2% and charges 0.09%.

PBP returned 3% year to date and 3% in the past 12 months while SPY gained 13% and 20% over those periods. PBP returned an average annual 7% the past three years and 1.7% the past five years. SPY trumped it by a wide swath, averaging 15% and 6% a year in those periods.

HPSX charges a 0.65% annual management fee.

Income From CEFs

Christian Magoon, former president of Claymore Securities before it was bought out by Guggenheim Investments, rolled out Friday the first ETF of his newly founded ETF firm, YieldShares, based in Chicago.

YieldShares High Income ETF ( YYY ), tracking the ISE High Income Index, holds a basket of 30 closed-end funds. The index screens the universe of 600 CEFs, selecting those with more than $500 million in assets and $100 million in average daily dollar trading volume. It picks the 30 highest-ranking CEFs based on discount to net asset value, liquidity and yield distribution.

The portfolio has nearly 60% assets invested in equity CEFs, 26% in bonds CEFs and 15% in asset-allocation CEFs, which can invest in anything their strategy calls for. CEFs in the ETF trade an average of 7% below their net asset value, or NAV. As of Friday the index, showed a yield of 9.5%, Magoon said.

Why buy YYY? Yield income, potential price appreciation and diversification, says Magoon, who owns 200 shares himself.

YYY charges a total annual management fee of 1.65% of assets, of which 1.15% covers fees of the underlying CEFs. It will compete mainly withPowerShares CEF Income Composite ( PCEF ), which has $465 million in assets after three years on the market.

New Flight To Colombia

IShares rolled out Thursday the second ETF offering exposure to Colombia.IShares MSCI Colombia Capped ETF (ICOL) will compete withGlobal X FTSE Colombia 20 ETF (GXG), which has attracted $141 million in assets since it debuted in February 2009.

"There is an increasing amount of foreign investment in Colombia because of strong fiscal management, gradually declining debt, positive trading ties with the world and business-friendly economic policies focused on deregulation," iShares said in a statement Thursday.

The index most heavily weights financials at 34.17% of assets, energy 32% and utilities 15%.

The MSCI Colombia index has tumbled 22% year to date and 14% in the past 12 months. As the No. 1 performing market the past decade, it has returned an average annual 6%, 9% and 29% over the past three, five and 10 years.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , ETFs
Referenced Symbols: HSPX , PBP , PCEF , SPY , YYY

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