Covered Call ETFs

Covered call writing is an options strategy used to generate call premium from equity holdings, which can, in turn, result in additional income within an investment portfolio. Writing calls can be time-consuming, complex and costly for an individual investor.

By investing in a Horizons’ covered call ETF, you free up time by not having to manage individual option positions, while you receive institutional option pricing and expert trading execution – all in a convenient, low fee** ETF structure.

Horizons ETFs offers the largest family of covered call ETFs in Canada giving you more “options” to meet your income needs.

Ticker ETF Name General Investment Objective Management Fee*
HEX Horizons Enhanced Income Equity ETF Exposure to the performance of large capitalization Canadian companies as well as distributions which generally reflect the dividend and option income for the period 0.65%
HEA.U1 Horizons Enhanced Income U.S. Equity (USD) ETF Exposure to the performance of large U.S. companies and monthly distributions which generally reflect the dividend and option income for the period 0.65%
HEJ Horizons Enhanced Income International Equity ETF Exposure to the performance of large capitalization international, non-North American companies and monthly distributions which generally reflect the dividend and option income for the period 0.65%
HEE Horizons Enhanced Income Energy ETF Exposure to the performance of Canadian companies involved in the crude oil and natural gas industry and monthly distributions which generally reflect the dividend and option income for the period 0.65%
HEF Horizons Enhanced Income Financials ETF Exposure to the performance of Canadian banking, finance and financial services companies and monthly distributions which generally reflect the dividend and option income for the period 0.65%
HEP Horizons Enhanced Income Gold Producers ETF Exposure to the performance of North American based gold mining and exploration companies and monthly distributions which generally reflect the dividend and option income for the period 0.65%
HGY Horizons Gold Yield ETF Exposure to the performance of the returns of gold bullion and monthly distributions which generally reflect the option income for the period 0.60% (aggregate)
HNY Horizons Natural Gas Yield ETF Exposure to the performance of the returns of natural gas futures and monthly distributions which generally reflect the option income for the period 0.85% (aggregate)
 

*Plus applicable sales taxes.
**Relative to regular mutual funds.
1Also available in CAD.

A Unique Approach to Covered Call Writing

While all of Horizons covered call ETFs are actively managed, they do follow some important investment rules which we believe optimize the performance of the strategy.

All equity-focused covered call ETFs write shorter-dated (less than two-month expiry), out-of-the-money (OTM) covered calls. The preference for the shorter-dated options is to limit the impact of the time decay. Shorter-dated options tend to provide a balance between earning an attractive level of premium while increasing the likelihood that the options will expire OTM (a positive trait for covered call writers).

The preference for writing options OTM is to preserve most of the upside price potential of the underlying securities. For this reason, these ETFs should have a strong correlation to the underlying securities they are writing calls on and investors should expect to generate most of the performance trajectory of the underlying securities plus additional income from the premium option generated from writing calls. At the same time, investors should also anticipate that the risk profile of covered call ETFs that use OTM options is very similar to the underlying securities the ETF invests in. For example, the Horizons Enhanced Equity Income ETF (HEX) would be expected to have a similar risk profile to large-cap Canadian equities.

The example below illustrates how an OTM strategy seeks to generate a total return that is comprised primarily of the price return of the underlying security that the covered call is written on, plus the value of any premium generated from the option.

How An OTM Covered Call Option Works

Assumptions: Stock purchased at $100. Call Option written at $105 strike. Premium received is $1.00

chart1.png

For illustrative purposes only.

How a Buy-Write Strategy Can Typically be Expected to Perform in the Following Markets

During bear markets, range-bound markets and modest bull markets, a covered call strategy generally tends to outperform its underlying securities. During strong bull markets, when the underlying securities may rise more frequently through their strike prices, covered call strategies historically have lagged. Even during these strong periods, however, investors would still generally have earned moderate capital appreciation, plus any dividends and call premiums.

chart2.png

For illustrative purposes only.

Characteristics of the Horizons Covered Call Strategy

• Earns call option premium income on those securities that do not typically pay any dividends (and on those that do)
• Uses a dynamic call-writing approach that seeks to optimize premium income
• Uses out-of-the-money calls to allow investors to participate in the upside potential of the underlying securities to a greater extent than do at-the-money calls
• Uses short-term calls to increase the potential for the options to expire without being exercised, thereby allowing new calls to be written (sold) on the same underlying securities and potentially more premiums to be harvested
• Employs full Active Management provided by an experienced options management team

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Horizons ETFs is a Member of Mirae Asset Global Investments. Commissions, trailing commissions, management fees and expenses all may be associated with an investment in exchange traded products managed by Horizons ETFs Management (Canada) Inc. (the "Horizons Exchange Traded Products"). The Horizons Exchange Traded Products are not guaranteed, their values change frequently and past performance may not be repeated. The prospectus contains important detailed information about the Horizons Exchange Traded Products. Please read the relevant prospectus before investing.

The Horizons Exchange Traded Products consist of the Horizons Index ETFs ("Index ETFs"), 2x Daily Bull and -2x Daily Bear ETFs ("2x Daily ETFs"), Inverse ETFs ("Inverse ETFs"), VIX ETFs (defined below) and active ETFs. The 2x Daily ETFs and certain other Horizons Exchange Traded Products use leveraged investment techniques that can magnify gains and losses and may result in greater volatility of returns. These Horizons Exchange Traded Products are subject to leverage risk and may be subject to aggressive investment risk and price volatility risk, which, where applicable, are described in their respective prospectuses. Each 2x Daily ETF seeks a return, before fees and expenses, that is either 200% or -200% of the performance of a specified underlying index, commodity or benchmark (the "Target") for a single day. Each Index ETF or Inverse ETF seeks a return that is 100% or -100%, respectively, of the performance of a Target. Due to the compounding of daily returns, a 2x Daily ETF's or Inverse ETF's returns over periods other than one day will likely differ in amount and possibly direction from the performance of their respective Target(s) for the same period. The Horizons Exchange Traded Products whose Target is the S&P 500 VIX Short-Term Futures Index™ (the "VIX ETFs"), one of which is a 2x Daily ETF and one of which is an Index ETF, as described in their prospectus, are speculative investment tools that are not conventional investments. The VIX ETFs' Target is highly volatile. As a result, the VIX ETFs are not generally viewed as stand-alone long-term investments. Historically, the VIX ETFs' Target has tended to revert to a historical mean. As a result, the performance of the VIX ETFs' Target is expected to be negative over the longer term and neither the VIX ETFs nor their Target are expected to have positive long term performance. Investors should monitor their holdings, as frequently as daily, to ensure that they remain consistent with their investment strategies.

*The indicated rates of return are the historical annual compounded total returns including changes in per unit value and reinvestment of all dividends or distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. The rates of return shown in the table are not intended to reflect future values of the ETF or returns on investment in the ETF. Only the returns for periods of one year or greater are annualized returns.