Here is an article on the commodity ETFs with the commodity covered call strategy from Morningstar. I LOVE these products and wanted to share with you. Their income streams were just announced and as I suspected they are nice and juicy. Sold option premiums are taxed as capital gains and as you know commodities don’t pay dividends like some stocks do. Outside of your RRSPs or RRIFs they are taxed better than bond, rental or salary income. They will fluctuate with volatility around the commodity so keep that in mind. You can see the Natural Gas premiums are much higher than the Gold, Silver an Oil because of the fear of Natural Gas continuing to drop.
Here are their projected distributions from Horizons:
HNY Horizons Gold Yield ETF 10.22%
HGY Horizons Silver Yield ETF 10.47%
HZY Horizons Crude Oil Yield ETF 11.61%
HOY Horizons Natural Gas Yield ETF 15.16%
Horizons launches monthly-pay commodity ETFs
Horizons Exchange Traded Funds Inc. today launched three commodity-based ETFs with a distinct twist: they’re designed to provide monthly distributions.
The new Toronto Stock Exchange-listed offerings — with exposure to silver, oil and natural gas — follow on the heels of Horizons Gold Yield. The latter has a similar cash-flow mandate and began trading a day earlier, right after having been converted from a closed-end fund.
The ETFs, which will employ covered call options, are available in two classes of units. (See table below.) Class E, the cheaper of the two classes, pays no advisor compensation. Management fees for Class E range from 0.60% to 0.85%, and also cover fund expenses. The Advisor Class pays brokers a trailer fee amounting to 0.75% annually, and charges management fees that are correspondingly higher.
Though they employ no leverage, these specialty funds are nonetheless highly volatile. Investors can expect sharp upward or downward moves at times, as net unit values reflect changes in the price of their underlying exposure.
Two-thirds of the portfolios will be exposed to changes in the price of the underlying commodity, hedged to the Canadian dollar. This exposure may be obtained through commodity ETFs, the commodity itself, or commodity futures.
But because of the use of covered calls to generate premiums, the ETFs will in effect partly hedge their commodity bets. Covered-call writing will generally be employed on the remaining one-third of the portfolios.
In return for a premium paid to the ETF, the option holder has the right to exercise the option to buy the commodity at the exercise price. This is normally settled by making a cash payment to the option holder of an amount equal to the difference between the price of the commodity and the option exercise price.
The exercise of the call options may limit or reduce the total returns of the ETFs, particularly in bullish markets. However, in flat or declining markets, the ETFs should outperform a strategy of simply holding the commodity and writing no options.
The covered-call strategy acts as a hedge against the volatility of commodity prices, since price volatility and option premiums tend to be positively correlated. In other words, the wider the swings in commodity prices, the higher the premiums that the ETFs can collect for writing the covered calls.
The covered-call writing will be managed by Eden Rahim, vice-president and options strategist at Horizons Investment Management Inc., an affiliate of Horizons ETFs. Rahim and his team are responsible for managing more than $500 million in covered-call ETF mandates under the Horizons brand name.
As part of its strategy to generate tax-efficient distributions, each ETF will enter into forward purchase and sale agreements with a bank counter-party. Returns to investors will be based upon the return on a portfolio providing exposure to the underlying commodity.
As part of this arrangement, the ETFs will hold a portfolio of publicly traded Canadian stocks. The distributions will vary, and there are no guarantees that distributions will be made each month. Because of higher fees, the distributions will be consistently lower for the Advisor Class units.
The use of forward contracts will enable the options premiums earned by the ETFs to be deemed to be return of capital, a Horizons ETFs official told Morningstar. (Return of capital becomes taxable only after the adjusted cost base of the investment reaches zero.) In addition, any gains in the net asset value resulting from increases in commodity prices will be taxed as capital gains.
|ETF and ticker symbols||Fees for
|Horizons Crude Oil Yield (HOY/HOY.A)||0.85%||1.60%|
|Horizons Gold Yield (HGY/HGY.A)||0.60%||1.35%|
|Horizons Natural Gas Yield (HNY/HNY.A)||0.85%||1.60%|
|Horizons Silver Yield (HZY/HZY.A)||0.75%||1.50%|
|Source: Horizons Exchange Traded Funds Inc.|