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Covered Call ETF Generates Income, New Highs


U.S. equity markets have been lethargic in recent months. As a result, investors have turned alternative investment strategies like covered call exchange traded funds to diversify their portfolios.

The Horizons S&P 500 Covered Call ETF (HSPX) , which employs a covered call strategy on the S&P 500, was up 0.1% Wednesday, touching an all-time high. HSXP is up 3.9% year-to-date.

The covered call strategy is a good way to generate cash in a muted market environment. By utilizing a covered call strategy, an investor who owns a stock sells, or “writes,” call options and collects the income from the premiums paid by the buyer of the option.

Specifically, HSPX’s 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.

The ETF issues a monthly dividend payout, with a recent distribution yield of 2.11%. [ETFs for Monthly Dividend Hunters]

While the performance of HSPX, and those of its rivals, has lagged the S&P 500 during the bull market last year, covered call ETFs can prove durable in range-bound or down-trending markets.

“Covered call strategies work well in three of the four market environments,” Howard J. Atkinson, Managing Director at Horizons ETFs Management, previously told ETF Trends. “Raging bull market – they tend to underperform…. But in a modest bull market, at a trading-range market, or a bear market, they will outperform, give you lower volatility and give you some income to boot.”

Along with HSPX, investors looking to take a more tactical approach to covered call ETFs can consider the Horizons Financial Select Sector Covered Call ETF (HFIN) , which tracks the S&P Financial Select Sector Covered Call Index. HFIN also issues dividends monthly, with a recent distribution yield of 5.36%.

Alternatively, investors can take a look at other covered call, or “buywrite,” ETF options. The Powershares S&P 500 BuyWrite Portfolio (PBP) , the largest buywrite ETF with $278.5 million in assets, has a 12-month yield of 1.37%. Other covered call ETFs include the AdvisorShares STAR Global Buy-Write ETF (VEGA) and the iPath CBOE S&P 500 BuyWrite ETN (BWV) .

For more information on the markets, visit our S&P 500 category.