An Introduction To Global X Covered Call ETFs

Published May 1, 2024

Global X offers one of the largest families of covered call ETFs in Canada giving you more “options” to meet your income needs.

Our suite of actively managed covered call ETFs is designed to provide exposure to key equity benchmarks and asset classes while generating additional income from utilizing covered calls. The goal of these ETFs is to meaningfully provide most of the upside return potential of the underlying securities in the portfolio while delivering an attractive source of monthly income.

For investors looking for income, using a covered call writing strategy can be an effective way to generate monthly returns from securities or asset classes that otherwise may not meet the income goals of the investor.

An investor who chooses to utilize a covered call strategy limits some of the upside potential gains that could be generated from the underlying stock portfolio in exchange for earning a higher income – in the form of call premium – earned from selling call options.

Covered call ETFs allow investors to earn immediate income from the underlying portfolio that should be relatively higher than what would’ve been generated by simply holding the securities by themselves. It does not mean that a higher return will necessarily be generated through the covered call strategy, but the investor can use this strategy to generate monthly income from a stock portfolio either to meet a potential income target or to diversify sources of income in their broader asset allocation.

¹ Plus Applicable Sales Tax
^* Trades in Canadian dollars

While all of Global X covered call ETFs are actively managed, they do follow some important investment rules which we believe optimize the performance of the strategy.

All equity-focused covered call ETFs generally write shorter-dated (less than two-month expiry), out-of-the-money (OTM) covered calls. Shorter-dated options tend to provide a balance between earning an attractive level of premium while increasing the likelihood that the options will expire without being “in-the-money” (a positive trait for covered call writers).

The options writing team will, generally, write covered call options on up to 50% of the underlying equities portfolio and in the case of HGY, no more than 33% of the portfolio.

This strategy is designed to preserve a portion of the upside price potential of the underlying securities. For this reason, these ETFs are expected to have a strong correlation to the underlying securities upon which they are writing calls and investors should typically expect to generate a portion of the performance trajectory of the underlying securities–plus additional income from the premium option generated from writing calls.

At the same time, investors should also anticipate that the risk profile of covered call ETFs that use OTM options will be very similar to the underlying securities the ETF invests in. The example below illustrates how an OTM strategy seeks to generate a total return that is comprised primarily of a portion of the price return of the underlying security that the covered call is written on, plus the value of any premium generated from the option.

Historically, during bear markets, and range-bound markets, a covered call strategy generally tends to outperform its underlying securities. During powerful bull markets, when the underlying securities may rise more frequently through their strike prices, covered call strategies historically have lagged. Even during these bull market periods, however, investors would still generally have earned moderate capital appreciation, plus any dividends and call premiums.

All of our covered call ETFs seek to create additional income from the underlying securities in the portfolio by utilizing covered calls.

For income-focused investors, covered call ETFs can be used to generate income outside of the fixed income allocation. An important feature of asset allocation, investors do not necessarily have to increase their fixed-income contributions to increase the level of income generated by their portfolio when using a covered call strategy.

The covered call ETFs have an experienced portfolio management team in options writing to get the best pricing on the options, and can dynamically shift the writing coverage to take advantage of market conditions.

While covered call ETFs would generally be expected to have a high degree of correlation to the market returns of the underlying exposure of the portfolio, the call premiums earned can offset declines in the portfolio. Historically, as market volatility rises, options premiums do as well, which means that this risk protection can increase during a more volatile market relative to the underlying securities in the portfolio.

DISCLAIMERS

Commissions, management fees, and expenses all may be associated with an investment in products (the “Global X Funds”) managed by Global X Investments Canada Inc. The Global X Funds are not guaranteed, their values change frequently and past performance may not be repeated.  Certain Global X Funds may have exposure to leveraged investment techniques that magnify gains and losses which may result in greater volatility in value and could be subject to aggressive investment risk and price volatility risk. Such risks are described in the prospectus. The Global X money market funds are not covered by the Canada Deposit Insurance Corporation, the Federal Deposit Insurance Corporation, or any other government deposit insurer. There can be no assurances that the money market fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the Funds will be returned to you. Past performance may not be repeated. The prospectus contains important detailed information about the Global X Funds. Please read the relevant prospectus before investing.

Certain statements may constitute a forward-looking statement, including those identified by the expression “expect” and similar expressions (including grammatical variations thereof). The forward-looking statements are not historical facts but reflect the author’s current expectations regarding future results or events. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results or events to differ materially from current expectations. These and other factors should be considered carefully and readers should not place undue reliance on such forward-looking statements. These forward-looking statements are made as of the date hereof and the authors do not undertake to update any forward-looking statement that is contained herein, whether as a result of new information, future events or otherwise, unless required by applicable law.

This communication is intended for informational purposes only and does not constitute an offer to sell or the solicitation of an offer to purchase investment products (the “Global X Funds”) managed by Global X Investments Canada Inc. and is not, and should not be construed as, investment, tax, legal or accounting advice, and should not be relied upon in that regard. Individuals should seek the advice of professionals, as appropriate, regarding any particular investment. Investors should consult their professional advisors prior to implementing any changes to their investment strategies. These investments may not be suitable to the circumstances of an investor.

All comments, opinions and views expressed are generally based on information available as of the date of publication and should not be considered as advice to purchase or to sell mentioned securities. Before making any investment decision, please consult your investment advisor or advisors.