Covered Call ETFs

Covered call writing is an options strategy used to generate call premiums 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-fee1 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 Fee2
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.U3 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%
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%

Relative to the typical management fee of regular mutual funds. In Canada, the average management fee for F class mutual funds is 0.81%. Source: Morningstar Direct, as at January 2019.
Plus applicable sales taxes.
A U.S.-dollar trading version is also available.

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 generally write shorter-dated (less than two-month expiry), out-of the-money (OTM) covered calls. The preference for the shorter-dated options is to maximize the benefits of rapid 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 a portion of the upside price potential of the underlying securities. For this reason, these ETFs should have a strong correlation to the underlying securities upon which they are writing calls and investors should typically expect to generate a portion 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 will be 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 a portion 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


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.


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 option premium income
• Uses OTM 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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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 value changes frequently and past performance may not be repeated. Certain ETFs may have exposure to leveraged investment techniques that magnify gains and losses and which may result in greater volatility in value and could be subject to aggressive investment risk and price volatility risk. Such risks are described in the prospectus. The prospectus contains important detailed information about the ETF. Please read the relevant prospectus before investing.

The Horizons Exchange Traded Products include our BetaPro products (the “BetaPro Products”). The BetaPro Products are alternative mutual funds within the meaning of National Instrument 81-102 Investment Funds, and are permitted to use strategies generally prohibited by conventional mutual funds: the ability to invest more than 10% of their net asset value in securities of a single issuer, to employ leverage, and engage in short selling to a greater extent than is permitted in conventional mutual funds. While these strategies will only be used in accordance with the investment objectives and strategies of the BetaPro Products, during certain market conditions they may accelerate the risk that an investment in shares of a BetaPro Product decreases in value. The BetaPro Products consist of our Daily Bull and Daily Bear ETFs (“Leveraged and Inverse Leveraged ETFs”), Inverse ETFs (“Inverse ETFs”) and our BetaPro S&P 500 VIX Short-Term Futures™ ETF (the “VIX ETF”). Included in the Leveraged and Inverse Leveraged ETFs and the Inverse ETFs are the BetaPro Marijuana Companies 2x Daily Bull ETF (“HMJU”) and BetaPro Marijuana Companies Inverse ETF (“HMJI”), which track the North American MOC Marijuana Index (NTR) and North American MOC Marijuana Index (TR), respectively. The Leveraged and Inverse Leveraged ETFs and certain other BetaPro Products use leveraged investment techniques that can magnify gains and losses and may result in greater volatility of returns. These BetaPro Products are subject to leverage risk and may be subject to aggressive investment risk and price volatility risk, among other risks, which are described in their respective prospectuses. Each Leveraged and Inverse Leveraged ETF seeks a return, before fees and expenses, that is either up to, or equal to, either 200% or –200% of the performance of a specified underlying index, commodity futures index or benchmark (the “Target”) for a single day. Each Inverse ETF seeks a return that is –100% of the performance of its Target. Due to the compounding of daily returns a Leveraged and Inverse Leveraged ETF’s or Inverse ETF’s returns over periods other than one day will likely differ in amount and, particularly in the case of the Leveraged and Inverse Leveraged ETFs, possibly direction from the performance of their respective Target(s) for the same period. For certain Leveraged and Inverse Leveraged ETFs that seek up to 200% or up to or -200% leveraged exposure, the Manager anticipates, under normal market conditions, managing the leverage ratio as close to two times (200%) as practicable however, the Manager may, at its sole discretion, change the leverage ratio based on its assessment of the current market conditions and negotiations with the respective ETF’s counterparties at that time. Hedging costs charged to BetaPro Products reduce the value of the forward price payable to that ETF. Due to the high cost of borrowing the securities of marijuana companies in particular, the hedging costs charged to HMJI are expected to be material and are expected to materially reduce the returns of HMJI to unitholders and materially impair the ability of HMJI to meet its investment objectives. Currently, the manager expects the hedging costs to be charged to HMJI and borne by unitholders will be between 10.00% and 45.00% per annum of the aggregate notional exposure of HMJI’s forward documents. The hedging costs may increase above this range. The manager publishes on its website, the updated monthly fixed hedging cost for HMJI for the upcoming month as negotiated with the counterparty to the forward documents, based on the then current market conditions. The VIX ETF, which is a 1x ETF, as described in the prospectus, is a speculative investment tool that is not a conventional investment. The VIX ETF’s Target is highly volatile. As a result, the VIX ETF is not intended as a stand-alone long-term investment. Historically, the VIX ETF’s Target has tended to revert to a historical mean. As a result, the performance of the VIX ETF’s Target is expected to be negative over the longer term and neither the VIX ETF nor its target is expected to have positive long-term performance. Investors should monitor their holdings in BetaPro Products and their performance at least as frequently as daily to ensure such investment(s) remain consistent with their investment strategies.

Horizons Total Return Index ETFs (“Horizons TRI ETFs”) are generally index-tracking ETFs that use an innovative investment structure known as a Total Return Swap to deliver index returns in a low-cost and tax-efficient manner. Unlike a physical replication ETF that typically purchases the securities found in the relevant index in the same proportions as the index, most Horizons TRI ETFs use a synthetic structure that never buys the securities of an index directly. Instead, the ETF receives the total return of the index through entering into a Total Return Swap agreement with one or more counterparties, typically large financial institutions, which will provide the ETF with the total return of the index in exchange for the interest earned on the cash held by the ETF. Any distributions which are paid by the index constituents are reflected automatically in the net asset value (NAV) of the ETF. As a result, the Horizons TRI ETF receives the total return of the index (before fees), which is reflected in the ETF’s share price, and investors are not expected to receive any taxable distributions. Certain Horizons TRI ETFs (Horizons Nasdaq-100 ® Index ETF and Horizons US Large Cap Index ETF) use physical replication instead of a total return swap. The Horizons Cash Maximizer ETF and Horizons USD Cash Maximizer ETF use cash accounts and do not track an index but rather a compounding rate of interest paid on the cash deposits that can change over time.

*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.