Covered Call ETFs

by Mike Scanlin

Several ETFs (exchange traded funds) use the covered call strategy. The best known are PBP (PowerShares S&P 500 ButWrite Portfolio ETF) and BWV (iPath CBOE S&P 500 BuyWrite Index exchange-traded note). Because of the success of the covered call strategy, new covered call ETFs continue to be created.

New Covered Call ETFs

Horizons Covered Call ETFs

Horizons ETFs Management is launching 3 new covered call ETFs, to complement their 12 existing covered call ETFs. These new ones are not trading yet, but will be soon. Each has a specific focus: S&P 500, financial sector, or energy sector:

  1. Horizons S&P 500 Covered Call ETF (HSPX)
  2. Horizons S&P Financial Select Sector Covered Call ETF (HFIN)
  3. Horizons S&P Energy Select Sector Covered Call ETF (HENG)

The first one is similar to the PowerShares and iPath funds except that the Horizons fund has lower fees (0.65% instead of 0.75% for PowerShares and iPath).

The Financial Select and Energy Select funds have slightly higher fees, coming in at 0.7%.

Should You Buy These ETFs?

As with many things in life, there is a trade-off between doing something yourself or hiring someone to do it for you. Clearly the continued creation of new ETFs like these validates the covered call strategy and so, assuming you are in the market for a financially-focused, energy-focused, or broad-based covered call ETF, your choice is: Do you want to pay 0.7% (or 0.65%) to someone else to manage it for you, or do you want to manage it yourself?

Fees Over Time

How much is 0.7%? If you had $100,000 to invest, fees would be $700/year. So, do you want to put in the time to manage a set of covered call investments and save $7,000 over 10 years, or would you rather pay someone else to look after that investment? (To be fair, the expense ratios of these new ETFs aren't super high as far as expense ratios go but, on the other hand, managing a set of covered call investments using systematic trading rules (like these funds do) isn't terribly time consuming or difficult, either.)

Other Covered Call Funds

There are many funds that have a strategy of writing covered calls against their holdings. Some funds only write calls on 50% or 80% of their holdings, leaving the remainder uncovered (for uncapped appreciation).

Some of the funds who write calls on 100% of their holdings include:

  • ETB - Eaton Vance Tax-Managed BuyWrite Income Fund
  • ETV - Eaton Vance Tax-Managed Buy-Write Opportunities Fund
  • ETW - Eaton Vance Tax-Managed Global Buy-Write Opportunities Fund
  • GPM - Guggenheim Enhanced Equity Income Fund
  • JLA - Nuveen Equity Premium Advantage Fund
  • JPZ - Nuveen Equity Premium Income Fund
  • JSN - Nuveen Equity Premium Opportunity Fund

Note that these are discretionary investment funds, meaning there are managers who actively pick and choose what stocks to buy (and then write calls against them). Not all actively managed funds have exhibited historical performances (after fees) that beat their benchmarks, so do your homework before investing.

Mike Scanlin is the founder of Born To Sell and has been writing covered calls for a long time.