Global X has launched a new ETF based on the Dow Jones Industrial Average (DJIA) that seeks to balance upside growth potential with income from a systematic covered call strategy.
Rohan Reddy, Director of Research at Global X ETFs.
The Global X Dow 30 Covered Call & Growth ETF (DYLG US) has been listed on NYSE Arca with an expense ratio of 0.60%.
A covered call is an options strategy whereby an investor holds a long position in an asset or index and sells or “writes” call options on that same asset or index in an attempt to generate more income (the additional income from option premium) than would otherwise be provided.
The tradeoff from generating more income is that the strategy sacrifices upside potential if the asset appreciates as the value of the call option tends to increase.
Covered call strategies may appeal to yield-seeking investors who are keen to avoid the duration risk posed by traditional fixed income asset classes amid rising interest rates. They can play an important role in investors’ portfolios, offering a diversified source of income while potentially mitigating downside risks.
In terms of the new ETF’s strategy, the fund is linked to the Cboe DJIA Half BuyWrite Index which consists of a long position in the DJIA combined with a systematic covered call overlay. Specifically, the ETF writes one-month at-the-money call options on the DJIA corresponding to 50% of the value of the fund’s portfolio. The strategy, therefore, aims to provide regular income while still allowing investors to capture half the upside potential of the underlying index.
This approach differentiates the fund from the existing Global X Dow 30 Covered Call ETF (DJIA US) which systematically writes call options on 100% of the portfolio’s value. DJIA houses $80 million in assets and also has an expense ratio of 0.60%.
According to Global X, with interest rate hikes possibly nearing a plateau, DYLG has been designed to serve investors who want to balance their income and growth potential, positioning their portfolios in an effort to capture some market upside in the longer term while still enjoying wider premiums from current elevated volatility.
Rohan Reddy, Director of Research at Global X ETFs, said: “As investors weigh market uncertainty against a potential end in Fed rate hikes and a strong underlying labor market, Covered Call & Growth strategies can be an effective way to navigate choppy markets while maintaining some upside potential. By buying the stocks in the DJIA, DYLG can help achieve a balance between growth and income while also helping investors diversify away from other major domestic indices.”
Beyond these two funds based on the DJIA, Global X also offers ‘Covered Call & Growth’ ETFs based on the S&P 500, Nasdaq 100, and Russell 2000 indices as well as sector-specific US equity indices focused on information technology and healthcare stocks. The firm also has ETFs delivering full 100% covered call strategies based on the S&P 500 and Nasdaq 100 as well as ESG-tailored versions of these indices. Collectively, the entire suite houses nearly $13bn in assets under management.