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Understanding Buy-Write and Covered Call ETFs

This article was originally published on ETFTrends.com.

The equity markets have experienced violent swings in a year of uncertainty, especially with the latest escalation in trade war talks tugging on investors' fears.

Nevertheless, investors who are worried about further risks may turn to alternative strategies that exhibit lower correlations to traditional assets, such as a buy-write or covered call exchange traded fund.

"The recent headlines surrounding the US / China 'trade war' I think have been overblown. With this presidency there will always be a headline to sensationalize but from an investors standpoint it is important to understand and be aware that there are products available to navigate elevated volatility while still maintaining the desired equity exposure," Horizons ETFs’ (US) Portfolio Manager and Head of Product Development, Jonathan Molchan, said in a note.

For example, investors can look to something like the Horizons Nasdaq 100 Covered Call ETF (QYLD) to capture a covered-call strategy that targets Nasdaq-100 securities.

QYLD Offers Dividend Yield, Downside Buffer

"If you still want to maintain exposure to tech and the broader Nasdaq-100 then QYLD is a great vehicle where it invests in, full replication, the stocks within the Nasdaq 100 Index and then writes at-the-money Nasdaq index options against the equity portfolio. The options’ premium received will increase with volatility and this can potentially benefit investors in two ways; whereby they receive a higher monthly dividend as well as the potential for a higher buffer of protection to the downside in the event of a market selloff," Molchan added.

Related: Yield-Generating ETF Options for Stumbling Markets

Covered call strategies can potentially augment a portfolio during periods of heightened volatility. The covered-call options allow an investor to hold a long position in an asset while simultaneously writing, or selling, call options on the same asset.

Traders would typically employ a covered-call strategy when they have a neutral view of the markets over the short-term and just gather income from the option premium. While these buy-write ETFs may not produce any phenomenal price returns compared to the broader equities markets, their underlying option strategy helped them generate outsized yields.

Looking at QYLD's indexing methodology, the NDX call that is written will have about one month remaining to expiration, with an exercise price just above the prevailing index level, or slightly out of the money. QYLD has a 0.60% expense ratio and generated a 9.56% 12-month yield.

For more news and strategy on buy-write ETFs, visit our buy-write ETFs category.