Investors are actively seeking income from their portfolio. High yielding, relatively low-risk securities are difficult to find in the U.S. and Canada. A new type of exchange traded fund recently has appeared in Canada that is designed to fill this mandate.
The ETFs employ a covered call write strategy. Equity securities are purchased and call options immediately are written against the securities. Most call options have an exercise price at or just above the price of the underlying security and expire within two months. Call premiums and dividends received by the fund beyond its book value are distributed on a monthly basis. The targeted annual returns from these funds are 8 to 10 per cent. Dividend income and capital gains from call premiums distributed by the ETFs are taxed at a lower rate than interest income.
Covered call write ETFs are not new. PowerShares began offering a covered call write ETF at the beginning of 2008. The ETF tracks the S&P 500 Index, but with less volatility than the underlying index. Dividends and call option premiums received by the fund are re-invested. Management expense ratio is 0.75 per cent.
BMO launched the first covered call write ETF in Canada in February. The BMO Covered Call Canadian Banks ETF was designed to provide exposure to a diversified portfolio of Canadian bank stocks. The ETF is rebalanced and reconstituted semi-annually in June and December. Management expense ratio is 0.65 per cent. According to recent press reports, it was the most popular ETF in April, with $82-million in net new sales.
Horizons AlphaPro recently launched three monthly pay "enhanced income equity" ETFs based on covered call write strategies. The first fund, the HAP Enhanced Income Equity ETF is based on an equally weighted portfolio of 30 big-cap Canadian equities. The second fund is the Horzions AlphaPro Enhanced Income Gold Producers ETF . The fund holds 15 equally weighted positions in senior gold producers listed on North American exchanges. Positions listed on U.S. exchanges are hedged against currency risk related to potential weakness in the U.S. dollar. The third fund is the Horizons AlphaPro Enhanced Income Energy ETF . The fund holds 15 equally weighted positions in big cap Canadian energy stocks. Positions in all funds are rebalanced on a semi-annual basis. Management expense ratio for all funds is 0.65 per cent.
Don Vialoux is the author of free daily reports on equity markets, sectors, commodities and Exchange Traded Funds. He is also a research analyst for JovInvestment Inc. Reports are available at www.timingthemarket.ca and www.equityclock.com. Follow him on Twitter @EquityClock.Report Typo/Error
- PowerShares S&P 500 BuyWrite Portfolio$21.540.00(0.00%)
- BMO Covered Call Canadian Banks ETF$18.00+0.06(+0.33%)
- Horizons Enhanced Income Equity ETF$6.88+0.01(+0.15%)
- Horizons Enhanced Income Gold Producers ETF$25.00+0.76(+3.14%)
- Horizons Enhanced Income Energy ETF$15.69+0.03(+0.19%)
- Updated December 2 12:49 PM EST. Delayed by at least 15 minutes.