The U.S. markets are climbing again on growing confidence that the Fed’s monetary stimulus tapering is not likely anytime soon. But this has troubled the financial sector which had benefited from a steeper yield curve as of late.
An environment of a tight yield spread is by no means good news for financial sector as it will lead to increased volatility in the space. The sector has been seeing rough trading over the past several sessions. Investors are now looking for safety and stability of their income in this space (read: Financial ETFs Tumble on Citigroup Warning).
For those investors, Horizons launched Horizons S&P Financial Select Sector Covered Call ETF- HFIN that seeks to limit downside risk in unfavorable market conditions by offering exposure to a covered call strategy.
A covered call is an option 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 it.
HFIN in Focus
This new ETF seeks to match the performance of the S&P 500 Financial Select Sector Stock Covered Call Index. Basically, the product will hold a long position in all the stocks of the S&P Financial Select Sector Index in substantially equal weights while at the same time, will short (write) call options on option-eligible stocks in the same 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 Financial Select Sector Index in case of rising markets.
Investors should note that the product will charge an annual fee of 70 bps, which is significantly lower than many products in the long/short strategy ETF space.
How does in fit in a portfolio?
This covered call strategy ETF could be an intriguing and novel choice for investors looking for upside potential in the financial sector with lower risk (read:Time to Hedge Your Risk with These 3 ETFs).
This is because the strategy limits the downside risk of selling call options and at the same time enables an investor to enjoy some capital gains if the underlying asset rallies.
The new product could deliver higher yields compared to simple financial products while reduce volatility of returns during various market cycles. It 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 yield for putting up this security as collateral.