Horizons ETFs Management has launched the Horizons S&P Financial Select Sector Covered Call ETF (HFIN), which uses a covered call strategy to potentially generate additional income from the option-eligible stocks in the S&P Financial Select Sector Index.
The new ETF has begun trading on the New York Stock Exchange under the symbol HFIN.
HFIN generally seeks to provide exposure to the performance of the S&P 500 Financial Select Sector Stock Covered Call Index and will make monthly distributions of dividend and net call option income, if any.
Horizons USA has an exclusive agreement with S&P Dow Jones Indices to offer an ETF in the US based on the underlying index.
“US stocks have been a great place to be invested over the last two years,” says Howard Atkinson (pictured), managing director of Horizons USA. “Some investors may feel that now is a good time to be looking at more defensive strategies to preserve some of their returns. A covered call strategy can keep you invested in equities and potentially lower the volatility of returns of those equities while attempting to generate additional income, which can mitigate losses, during certain market conditions.”
HFIN uses an index replication strategy, investing substantially all of its total assets in the same securities of the underlying index. HFIN will generally own all the securities of the Reference Stock Index, in substantially similar weights to the index, and will sell or “write” covered call options on up to 100 per cent of each of the individual option-eligible securities in the portfolio. 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 more income (the additional income from option premium) than the asset would otherwise provide on its own from dividends or other distributions.
The underlying index uses an “out-of-the-money” covered call strategy which systematically determines the strike prices and call coverage of each position based on the prevailing price and implied volatility of the stock at the time the calls are written. An “out-of-the-money” call option is one with a strike price higher than the current market price of the underlying security.
Historically, during bear markets, range-bound markets and modest bull markets, this type of covered call strategy has generally outperformed its underlying securities. During strong bull markets, when the underlying securities may frequently rise through their strike prices, covered call strategies historically have tended to lag.
“HFIN is the second ETF we’ve launched in the US market that replicates one of S&P’s covered call indices. HFIN uses the same methodology as the Horizons S&P 500 Covered Call ETF, which trades on the NYSE under the ticker HSPX,” says Atkinson.
“While the strong bull market in US stocks has made it difficult for this type of covered call strategy to outperform a reference stock index,” Atkinson adds. “We’ve been impressed with the ability of HSPX to deliver most of the market returns of the S&P 500. HFIN will seek to have a similar return profile and deliver most of the upside of the S&P Financial Select Sector Index and potentially outperform the index when it generates option premium income.”
