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An Investor's Guide to Horizons Covered Call ETFs

Options strategies for the income oriented investor


The investment professionals at Horizons ETFs seek to complement to your current equity income investments via the Horizons Covered Call ETFs. The strategy of these funds is designed to help generate income and seeks to lower the risks of investing in the securities followed by a variety of Major U.S. indexes.

The covered call position employed by the Horizons Covered Call ETFs is created by buying (or owning) stock and selling a call option on a share-for share basis. In return for the sale of the call option, the stock owner receives a premium, which can potentially provide income in sideways markets and limited protection in declining markets. However, the investor is giving up their profit potential if the stock rises above the strike price of the call. The call premium can increase income in neutral markets, but if the market goes up, the seller of the call is obligated to sell their stock at the predefined strike price at the expiration date of the call option.

What Are Some Potential Benefits?

  1. Professional Options Management: Horizons ETFs investment professionals write the call options on a variety of major U.S. Indexes, rather than an individual investor needing to undertake a potentially expensive, time consuming, and complex call writing process.
  2. Income Sources: The ETFs seek to collect dividends from the companies in the various major U.S. indexes and monthly options premium from selling index options – potentially creating a different source of income from your current income investments.
  3. Seeks a Measure of Portfolio Protection: Monthly options premium collected from selling index call options may serve as a buffer from market downswings in the underlying index, which may lower the volatility of the portfolio. However, covered call writing limits the upside potential of the underlying security.

The Covered Call Process Explained

Nasdaq 100 Covered Call Example:

  • Horizons ETFs buys all the equities in the Nasdaq 100 Index
  • Horizons ETFs then sells Nasdaq 100 Index options (NDX) to a counter party that will expire in one month
    • Index options can’t be called/exercised early
    • A premium is received in exchange for the sale of the index options
  • At the end of the month, Horizons ETFs seeks to distribute a portion of the income from writing/selling the NDX index option to the ETF shareholders
  • At the beginning of each new month this process is repeated – Horizons ETFs sells Nasdaq 100 Index options (NDX) to a counterpart that will expire in one month, and cycle is restarts.

Market Scenarios

Horizons Covered Call ETFs write/sell monthly index options, not individual single stock options

Index option Basics:

  • Expire at the end of the month
    • Can’t be called/exercised early
    • This is unlike single stock options which can be called/exercised at anytime
  • Settle in cash, not equities/stocks
    • Unlike single stock options which settle in equities/stocks

Market Goes Down

If the index goes lower at the end of the month, the Fund would still keep the money collected from selling the index call option. Although the index is now worth less than it was before, the Covered Call ETF may still benefit from the premium received. This may offset some or all of the index decline.

Market Stays Flat

If the index price has not changed at the end of the month, the Covered Call ETF gets to keep the money collected from selling the monthly index call and the Fund still owns the underlying equities.

Market Goes Up

However, if the index price rises at the end of the month, potential gain will be limited since the Fund sold a call option at a predefined strike price. As the index rises above the strike price, the Fund still keeps the money collected from selling the monthly index call option, but won’t benefit from the entire increase in the index value.

Horizons Covered Call ETF Comparison

QYLD HSPX
Base Index Nasdaq 100 S&P 500
Percentage of the Call Option Overwrite Fixed 100% (“Buy-Write”) Fixed 100% (“Buy-Write”)
Option Strategy At-the-money 2% out-of-the-money
Types of Call Options Used NDX Index Options SPX Index Options
Distribution Frequency Monthly Monthly
Use of Leverage No No
Gross Expense Ratio 0.60% 0.65%

How to use in a portfolio?

Complement current investment strategies: Horizons Covered Call ETFs seek to collect monthly option premiums from the use of monthly index options, which can potentially create a difference source of income to complement current investor portfolios. Both funds have a Morningstar rating of 5 star as of 3/31/18 out of 82 Funds in the Options-based category.

– Nasdaq 100 Covered Call ETF (QYLD)     

– S&P 500 Covered Call ETF (HSPX)     

Investing in horizons etfs is easy

ETFs are funds that trade on an exchange like a stock. They are an easy to use, low cost, and tax efficient way to invest money. ETFs are widely available on most online brokerage accounts and through financial advisors.

– Talk to your financial professional about adding Horizons Covered Call ETFs to your portfolio

– Purchase Horizons Covered Call ETFs through an online brokerage account of your choice

– Have questions? Feel free to give us a call at (855) 496 3837

© 2018 Horizons ETFs Management (US) LLC. All Rights Reserved.

Before investing you should carefully consider the fund’s investment objectives, risks, charges and expenses. This and other information is in the prospectus, a copy of which may be obtained on this website. Please read the prospectus carefully before you invest

There are risks involved with investing, including possible loss of principal. Concentration in a particular industry or sector will subject the funds to loss due to adverse occurrences that may affect that industry or sector. Each sector fund is subject to its own specific risk factors. See prospectus for specific risks regarding fund. Investors in the funds should be willing to accept a high degree of volatility in the price of the fund’s shares and the possibility of significant losses. International investing involves risks, including -risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/developing markets or in concentrations of single countries. Diversification may not protect against market risk or loss of principal. DAX and QYLD are considered non-diversified and may be subject to greater risks than a diversified fund.

QYLD and HSPX both engage in options trading. An option is a contract sold by one party to another that gives the buyer the right, but not the obligation, to buy (call) or sell (put) a stock at an agreed upon price within a certain period or on a specific date. A covered call option involves holding a long position in a particular asset, in this case U.S. common equities, and writing a call option on that same asset with the goal of realizing additional income from the option premium.

QYLD engages in writing covered call index options on the Nasdaq-100 Index and HSPX engages in writing covered call index options on the S&P 500® Index. By selling covered call options, the fund limits its opportunity to profit from an increase in the price of the underlying index above the exercise price, but continues to bear the risk of a decline in the index. A liquid market may not exist for options held by the fund. While the fund receives premiums for writing the call options, the price it realizes from the exercise of an option could be substantially below the indices current market price.

Horizons ETFs Management (US) LLC is the investment adviser of HSPX, DAX, QYLD, and USDY. The funds are distributed by Foreside Fund Services, LLC, which is not affiliated with Horizons ETFs Management (US) LLC or any of its affiliates.

Individual shares of the horizons-branded exchange traded funds (the “funds”) may be purchased or sold in the secondary market throughout the regular trading day on the New York stock exchange or Nasdaq exchange through a brokerage account. Brokerage commissions will reduce returns. However, shares are not individually redeemable directly from the funds. Each fund issues and redeems shares on a continuous basis, at NAV, only in blocks of shares (“creation units”), principally in-kind for securities included in the relevant index. The creation units for DAX, QYLD, HSPX, and USDY are 50,000 shares.

*Morningstar rating as of 3/31/18. the Morningstar rating™ for funds, or “star rating”, is calculated for managed products (including mutual funds, variable annuity and variable life sub-accounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar risk-adjusted return measure that accounts for variation in a managed product’s monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The overall Morningstar rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar rating metrics. The weights are: 100% three-year rating for 36-59 months of total returns, 60% five-year rating/40% three-year rating for 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods.