Toronto-based Horizons ETFs and its affiliate AlphaPro Management have added the Horizons Active S&P/TSX 60 Index Covered Call ETF (HAX) to their growing line-up of active covered call (or buy-write) strategy exchange-traded funds (ETFs). This latest fund applies a covered call strategy to stocks within the S&P/TSX 60 Index.

The Horizons Active S&P/TSX 60 Index Covered Call ETF (HAX) applies a covered call strategy to stocks within the S&P/TSX 60 Index.

The ETF charges a management fee of 0.65% and will be listed on the Toronto Stock Exchange.

The objective of the fund is to provide investors with exposure to the performance of the S&P/TSX 60 Index together with mitigated downside risk and monthly distributions of dividend and call option income.

The fund will hold all 60 of the constituent stocks in the S&P/TSX 60 Index in proportion to their respective weights in the index. The ETF will then write covered call options on eligible securities in the portfolio to generate a tax-efficient, monthly distribution. The level of covered call option writing may vary based on market volatility and other factors.

The S&P/TSX 60 covers approximately two-thirds of Canada’s equity market capitalisation and represents the large-cap segment of the market. The index is structured to reflect the sector weights of the S&P/TSX Composite. Companies in the financial, energy and materials sectors dominate with a combined weight of 78.8%. Major holdings include Royal Bank of Canada, Toronto Dominion Bank, Bank of Nova Scotia, Suncor Energy and Bank of Montreal.

Howard Atkinson, CEO of Horizons ETFs, said: “This is the first covered call ETF in Canada that will proportion its holdings to that of S&P/TSX 60 Index, which is, in our view, the most important Canadian stock benchmark. Covered call strategies have historically been shown to enhance the income earned from stocks while reducing volatility.”

The day-to-day running of the option strategy component of the fund will be led by Eden Rahim, Vice-President and Options Strategist at Horizons ETFs. This will be the eighth equity-focused covered call ETF that Horizons ETFs has launched which uses Rahim’s covered call writing strategy.

Atkinson added: “Eden and the team oversee more than $500 million in assets on behalf of Horizons ETFs. They have done a terrific job of raising awareness to covered call products in Canada and the benefits they can potentially offer investors including generating income and mitigating portfolio risk.”

Covered call option strategies perform particularly well in sideways trending markets when stocks are range bound and call options expire worthless. In this kind of environment the writer of the options is able to pick up option premiums without having to sell stock. However, if markets rally and stocks shoot through their option strike prices, options will be executed. This results in the writer of the option being forced to sell stock at prices lower than the current market value, thereby losing out on upside performance.

Essentially, therefore, covered call option strategies can provide extra income and reduced downside risk (the option premium offsets some of the losses associated with a falling market) but at the cost of forgoing some upside potential.

European investors looking to access a covered call (or buy-write) strategy have a couple of choices, namely the Lyxor ETF EURO STOXX 50 BuyWrite (BWE), based on the EURO STOXX 50 Index, or the Lyxor ETF DAXplus Covered Call (CCD), based on the DAX Index. These funds provide exposure to a covered call strategy on European and German large-cap stocks respectively.