Horizons New Covered Call ETFs – HSPX, HFIN
It’s been another busy year for ETF innovation.
ETF providers have brought 140 new exchange traded products to the market this year. That’s down a little from last year’s 165 new ETFs but still represents rapid expansion in the ETF industry.
The list includes new spins on stocks ETFs, Bond ETFs, and Commodity ETFs, as well as new actively managed ETFs, real estate ETFs, and currency ETFs.
Two of the more interesting alternative ETFs launched this year come from The Horizons ETF Group. The global financial services company launched their first two US based ETFs this year.
Both of the new ETFs from Horizon use a covered call strategy. If you’re unfamiliar with options, a covered call strategy is a conservative option strategy designed to increase the amount of income you can generate by holding the stock and collecting the dividend.
A covered call strategy has two parts. First you own a stock or basket of stocks. The next step involves selling or writing call options with a strike price above the current stock price.
The option premium collected is income. For this income, they are obligated to sell the underlying stock at an agreed upon price before the option expires.
The way Horizons covered call ETFs work is by owning a basket of individual stocks and selling call options on each individual stock that expire in one month. And they roll them on a month-to-month basis.
In June, they launched the Horizons S&P 500 Covered Call ETF (HSPX). As the name suggests, HSPX owns all of the stocks in the S&P 500. And they sell options against each individual stock to generate additional monthly income.
HSPX is currently trading for $43.63. It’s up 9% so far this year. And it’s on pace to distribute income at a rate of 1.8%. It has an expense ratio of 0.65%.
And just last month they launched the Horizons S&P Financial Select Sector Covered Call ETF (HFIN) in November. It invests in stocks in the financial sector and writes call options against the individual stocks.
In HFIN’s short history, the share price has been flat at $40.00. And it hasn’t paid a monthly distribution yet. The first one will be paid on January 10, 2014.
Here’s the bottom line…
Covered call strategies on individual stocks has been a staple for boosting income and returns. But doing it on this level is too time consuming and cost prohibitive for most investors.
If you want to implement the strategy HSPX uses, you would need to own 100 shares of each stock in the S&P 500. Then spend the time and money executing the sale of the call option and rolling them each month.
If you’re looking for an easy way to implement a covered call strategy in your portfolio, take a look at HSPX and HFIN… they do all the heavy lifting for you. And you get to sit back and reap the rewards.
Good Investing,
Corey Williams
Category: ETFs
