CI Global Asset Management has launched a new ETF in Canada providing high-income exposure to North American utility stocks.
Utility stocks historically have enhanced the income potential and defensive characteristics of investors’ portfolios.
The CI Utilities Giants Covered Call ETF has been listed on Toronto Stock Exchange where it is available in CAD-hedged (CUTL CN) and non-currency-hedged (CUTL.B CN) share classes.
The ETF comes with a management fee of 0.65%.
While the fund is technically actively managed, its investment process is primarily rules-based. The ETF invests in an equally weighted portfolio consisting of the 20 largest utility companies listed in the US or Canada. Constituents must have tradeable call options with sufficient liquidity to be eligible for selection. Reconstitution and rebalancing occur on a quarterly basis.
Utility stocks include companies that own and operate infrastructure related to electricity, water, gas, sewage, and telecommunications. These firms have historically offered above-market dividends as well as exhibited defensive characteristics, delivering relative stability and consistent income even during periods of heightened volatility.
In a bid to further enhance the ETF’s monthly income and lower its overall volatility, the fund may write call options on its underlying holdings up to 25% of the value of the portfolio’s assets.
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 the option’s premium) than the asset would otherwise provide on its own from dividends or other distributions.
Historically, during bear markets, range-bound markets, and modest bull markets, this type of covered call strategy has generally outperformed its underlying securities. However, during strong bull markets, when the underlying securities may frequently rise through their strike prices, covered call strategies historically have tended to lag.
According to CI Global, the fund is especially timely given that recent increased market volatility is translating to higher call option premiums, boosting the strategy’s income potential.
Roy Ratnavel, Executive Vice-President and Head of Distribution for CI Global Asset Management, said: “Our covered call funds offer investors new opportunities in challenging markets. They generate steady income and deliver a measure of downside protection while maintaining exposure to the upside potential of a portfolio of high-quality companies. With this new ETF, we’re providing additional options to access this valuable, proven strategy.”