Horizons ETFs Management LLC, a Canada-based ETF issuer, today is launching its first U.S.-listed exchange-traded fund, an S'P 500 ETF with a covered-call overlay. The fund will join three similar strategies already on the U.S. market, but have bragging rights as the cheapest in class.
The Horizons S'P 500 Covered Call ETF (HSPX) launched with the help of Exchange Traded Concepts. It will have an annual cost of 0.65 percent, or $65 for each $10,000 invested—cheaper than its three competitors, including the segment leader, the $193 million PowerShares S'P 500 BuyWrite Portfolio (PBP), which costs 0.75 percent a year.
In addition to being the cheapest, Howard Atkinson, managing director of Horizons USA, mentioned in the press release announcing the fund’s launch that it’s the “first covered call ETF strategy that seeks to write on all eligible individual stocks in the S'P 500.” [emphasis added]
The new ETF “increases income for the investor beyond just the dividends that the S'P 500 stocks pay out,” Atkinson said in an interview.
By investing in out-of-the-money calls whose strike prices are above the current market value of a stock, HSPX allows investors to get enhanced income from the strategy while minimizing volatility more than a simple, long equity portfolio would. Out-of-the-money, covered-call strategies like HSPX’s will outperform in conditions ranging from mildly bullish to bearish, but won’t do as well in a strong bull market.
HSPX’s other two competitors are the actively managed AdvisorShares STAR Global Buy-Write ETF (VEGA), which has $22 million in assets and costs 2.01 percent a year; and the iPath CBOE S'P 500 BuyWrite ETN (BWV), an exchange-traded note with just under $10 million and an expense ratio of 0.75 percent—the same price as PowerShares’ PBP.
Timing May Be Right
Atkinson posits that markets have been bullish for some time now, and with weeks of testing how HSPX tracks its index—the newly created S'P 500 Stock Covered Call Index—he feels this launch comes at a potentially auspicious time in terms of current market conditions.
Because HSPX holds the securities it writes calls on, the fund minimizes the risk by allowing for delivery of those securities, should a call expire before a further-out call is written.
Horizons is no stranger to the covered-call ETF niche. The firm has 12 different actively managed covered-call ETFs currently listed on the Canadian market, which are different than the index strategy HSPX will use. Horizons ETFs has about half a billion dollars in collective AUM between those 12 funds.
In addition to the similar strategies listed in Canada , Horizons’ currently has ETFs listed in four markets: Korea , Hong Kong , Australia and Canada , with strategies that include bond funds, leveraged/inverse, equities, alternatives and actively managed funds.
Atkinson explained that, “In a more nascent market like Australia , we tend to go more plain vanilla.”
However, when entering into a mature market like the U.S. or Canada, he went on to say:“We want to be the first or second with a strategy; we don’t want to compete with a number of incumbents, where all it really becomes is a race to the bottom in terms of fees.”
Horizons will act as subadvisor to the fund, with Exchange Traded Concepts acting as investment manager. The fund will pay monthly dividends.
HSPX’s launch comes more than a year after Horizons put this and two other funds into registration , as well as a few weeks after the firm released an updated prospectus with expense ratios and tickers added to the three funds that suggested launch time was nearing.
The launch of the other two funds put into registration simultaneously with HSPX—the Horizons S'P Financial Select Sector Covered Call ETF (NYSEArca:HFIN) and the Horizons S'P Energy Select Sector Covered Call ETF (HENGY)—is contingent on the success of HSPX; no date is currently planned for either fund.
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