BMO Global Asset Management has launched what it claims to be the UKs first enhanced income exchange traded funds (ETFs) based on a covered calls strategy.
The strategies aim to generate income from selling call option contracts in addition to the dividend income received from the underlying stocks in the index.
Option-based strategies are designed to take advantage of the supply-demand imbalance that exists between investors looking to hedge their equity positions and the lower number of hedge providers.
In theory this enables the fund to make enhanced returns from the ‘volatility risk premium’ - the difference between implied volatility in the option and realised volatility - which investors are willing to pay for hedging solutions and generate income for investors while managing the downside risk.
The suite of ETFs include three funds aiming to give equity exposure with a ‘sustainable, high yield derived from dividends and employing a covered call option overlay,' the firm said.
The strategies, cover UK, Europe and US markets:
- BMO Enhanced Income UK Equity UCITS ETF (ZWUK LN)
- BMO Enhanced Income Euro Equity UCITS ETF (ZWEU LN)
- BMO Enhanced Income USA Equity UCITS ETF (ZWUS LN)
Income is distributed quarterly and the ETFs target a yield enhancement of 3% over the chosen equity benchmark.
BMO expects a total gross yield of around 5% for the BMO Enhanced Income USA Ucits ETF and approximately 7% for the BMO Enhanced Income UK Ucits ETF and BMO Enhanced Income European Ucits ETF.
The ETFs are listed on the London Stock Exchange, each with an ongoing charges figure (OCF) of 0.30% per annum.
The new funds will continue push BMO's expansion into the ETF market, which it kicked off with the launch of a suite of absolute return ETFs in 2015.
'Investors’ search for yield is as strong as ever, as is their focus on ensuring their portfolios are protected on the downside, minimising volatility risk,’ said Rob Thorpe (pictured), head of UK intermediary at BMO Global Asset Management.
‘With this new suite of ETFs we are able to directly address many concerns that professional investors have, which is how they can precisely manage their portfolios to a desired level of income, while still maintaining the potential for capital gains. We expect they will find our new range of high yielding ETFs a very useful tool.’
The Canadian asset manager, which merged with F&C in 2015, currently has £23.5 billion assets under management across its systematic and ETF strategies across the world.