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Horizons Launches Covered Call ETF (HSPX)

The Fed’s talk of possibly phasing out of the monetary stimulus this year put stress on U.S. markets last week, thereby raising chances of higher interest rates. This, along with growing concerns about China’s economy, resulted in increased volatility across the board (read: 3 Sector ETFs to Profit from Rising Rates).

Investors are naturally worried about their income safety and are seeking higher returns from a portfolio that is less volatile. To help investors with this goal, Horizons just launched the Horizons S&P 500 Covered Call ETF (HSPX) which looks to offer stability and income, a combination that is key in this type of market environment.

HSPX in Focus

This new ETF seeks to match the performance of the S&P 500 Stock Covered Call Index, before fees and expenses, giving investors exposure to a covered call strategy. A covered call is an options 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 the asset (see more in the Zacks ETF Center).

Basically, the product will hold a long position in the stocks of the S&P 500 Index while at the same time, will short (write) call options on option-eligible stocks in the S&P 500 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 500 in case of rising markets.

Investors should note that the product will charge an annual fee of 65 bps, which is significantly lower than the other products in the long/short strategy ETF space.

Can it Succeed?

This covered call strategy appears beneficial for investors given the ongoing volatility and rising interest rates that are troubling securities and could put pressure on the high yielding products (read: When to Purchase the High Yielding Buy Write ETF).

The new product could deliver a higher yield than the dividend-focused counterparts and reduce the volatility of returns during various market cycles. It also 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 a yield for putting up this security as collateral.

It is also worth noting that the strategy limits the otherwise unlimited downside risk of selling call options and at the same time enables an investor to enjoy capital gains if the underlying asset rallies. However, the strategy is generally useful when the underlying asset has a neutral to bearish outlook, and gains can be capped.

In terms of competitors, there are currently two major covered call products – Barclays iPath S&P 500 BuyWrite Index ETN (BWV) and PowerShares S&P 500 BuyWrite Portfolio ETF (PBP) – targeting the broad market. Both cost investors 75 bps per year but PBP is far more popular with more than $199 million in AUM (also read ALPS Launches New Income ETF).

Given this, it is hard to say how the new Horizons ETF will do in terms of investor interest. But if it manages to generate a decent yield and stable returns, it won’t be too hard to see PBP like inflows for this potentially game-changing product.

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