Ahead of next week’s FOMC meeting, there has been much speculation of a small taper by the US Fed, although markets seem to finally accept that a rate hike won’t happen until 2016. The recent bipartisan deal to avoid a future government shutdown has only strengthened this argument. But this doesn’t bode well for the financial sector which had benefited from a rising yield curve as of late.
An environment of low yields and tight spreads is bad news for commercial lenders and the financial sector as it leads to lower margins. However, since the sector is highly cyclical, it is likely to outperform the markets as the economy continues to mend. Hence, if you wish to limit downside risk in an uneven recovery, you may consider the latest offering from Canada-based Horizons ETF Group.
Horizons USA, the American member of one of the largest collective families of exchange-traded funds in the world, has unveiled the Horizons Financial Select Sector Covered Call ETF (HFIN) offers exposure in an options overlay strategy through covered calls. In a covered call, an investor holds a long position in an asset and writes a call option to generate higher returns from it in unfavorable market conditions.
HFIN tracks the performance of the S&P 500 Financial Select Sector Stock Covered Call Index, which means the fund, while holding a long position in the S&P Financial Select Sector Index, simultaneously writes call options every month. This generates additional income through option premiums in bear markets while offering exposure to limited capital appreciation (to the extent of the option strike price) during market rallies. The fund writes out-of-money call options on up to 100 percent of each of the individual option-eligible equities in the portfolio.
Historically, covered-call strategies have generally outperformed its underlying securities in bear markets, range-bound markets and modest bull markets, but lagged during strong bull runs. HFIN distributes dividends, if any, and income from call options every month.
The fund has an annual management fee of 0.70 percent.
Disclosure: No holdingsContact Ulli