# New covered calls ETFs from Horizons



## gibor365 (Apr 1, 2011)

Horizons is launching 2 new ETFs:
*Horizons AlphaPro Enhanced Income Energy ETF (HEE) *
The investment objective of HEE is to provide unitholders with: (a) exposure to the performance of an equal weighted portfolio of Canadian companies that are involved in the crude oil and natural gas industry; and (b) monthly distributions of dividend and call option income.
Top Holdings % of NAV 
Arc Resources LTD. 6.67% 
Athabasca 6.67% 
Crescent Point Energy Corp 6.67% 
Canadian Natural Resources 6.67% 
Canadian Oil Sands 6.67% 
Cenovus Energy Inc. 6.67% 
EnCana Corporation 6.67% 
Enerplus Corporation 6.67% 
Husky Energy Inc. 6.67% 
Imperial Oil Limited 6.67% 
Nexen Inc. 6.67% 
Pacific Rubials Energy 6.67% 
Penn West Exploration 6.67% 
Suncor Energy Inc. 6.67% 
Talisman Energy Inc. 6.67% 
TOTAL 100% 

and *Horizons AlphaPro Enhanced Income Gold Producers ETF ("HEP")*
The investment objective of HEP is to provide unitholders with: (a) exposure to the performance of a portfolio of North American based gold mining and exploration companies; and (b) monthly distributions of dividend and call option income. Any foreign currency gains or losses as a result of HEP's investment in non-Canadian issuers will be hedged back to the Canadian dollar to the best of its ability.
Top Holdings % of NAV 
Barrick Gold Corporation 6.67% 
Agnico-Eagle Mines Limited 6.67% 
AngloGold Ashanti 6.67% 
Detour Gold Corporation 6.67% 
Eldorado Gold Corporation 6.67% 
Goldcorp Inc. 6.67% 
Gold fields Limited 6.67% 
Rangold Resources Ltd. 6.67% 
Harmony Gold Mining Co. Ltd. 6.67% 
Iamgold Corporation 6.67% 
Ivanhoe Mines Ltd. 6.67% 
Kinross Gold Corporation 6.67% 
Newmont Mining Corporation 6.67% 
Pan American Silver Corp 6.67% 
Silver Wheaton Corp. 6.67% 
TOTAL 100% 

What is your opinion on those?


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## webber22 (Mar 6, 2011)

It looks like the target yields for these products have been removed from the website. The HEX target was 10% when introduced last month, but that is no where to be found on their site now, oh oh


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## gibor365 (Apr 1, 2011)

webber22 said:


> It looks like the target yields for these products have been removed from the website. The HEX target was 10% when introduced last month, but that is no where to be found on their site now, oh oh


I noticed it too and sent e-mail for Fund Manager. His reply:
"HEX pays out monthly distributions. A press release will be issued in the next week or so announcing the amount of the distribution and the payment date (anticipated being in early May 2011 for the month of April).

We had to revise the website as we are not allowed to provide any sort of performance information for any ETF that is under 1 year old."


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## Lephturn (Aug 31, 2009)

Very interesting - I want to dig into it more - thanks for pointing these out.


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## gibor365 (Apr 1, 2011)

We'll see next week what dividends Horizons announces next week...so far i hold similar BMO product ZWB and they paying nice dividends (about 10% annual) monthly


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## gibor365 (Apr 1, 2011)

AlphaPro Management Inc. announced today the applicable monthly distributions (the "Distributions") to unitholders of the ETFs for the month ending April 30, 2011 as indicated in the table below. 

The ex-dividend date for the Distributions is anticipated to be April 27, 2011, for all Unitholders of record on April 29, 2011. The Distributions will be paid in cash or, if the Unitholder has enrolled in the respective ETF's dividend reinvestment plan (DRIP), reinvested in additional units of the applicable ETF, on or before May 11, 2011. 

Horizons AlphaPro Enhanced Income Equity ETF HEX $0.17874 (1) 14.31% (1) Monthly 
Horizons AlphaPro Enhanced Income Energy ETF HEE $0.07861 (2) 15.57% (2) Monthly 
Horizons AlphaPro Enhanced Income Gold Producers ETF HEP $0.14562 (2) 28.26% (2) Monthly


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## andrewf (Mar 1, 2010)

gibor, do you have a link to the announcement about the distributions? Those yields seem suspiciously high. It's possible that they were proceeds from more than one month.


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## larry81 (Nov 22, 2010)

andrewf said:


> gibor, do you have a link to the announcement about the distributions? Those yields seem suspiciously high. It's possible that they were proceeds from more than one month.


https://research.tdwaterhouse.ca/research/public/Markets/NewsArticle/100-109c9361-1


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## andrewf (Mar 1, 2010)

There were some important caveats to that release:



> (1) The Horizons AlphaPro Enhanced Income Equity ETF (HEX) was launched on March 17, 2011. The monthly rate for April includes a prorated payment for the period from the ETF's launch to March 31, 2011. Monthly distributions are based primarily on option premiums written against the ETF's equity portfolio. As such, the current rate of distribution may not be repeated in future months.
> 
> (2) The Horizons AlphaPro Enhanced Income Energy ETF (HEE) and Horizons AlphaPro Enhanced Income Gold Producers ETF (HEP) were launched on April 12, 2011. Monthly distributions are based primarily on option premiums written against each ETF's equity portfolio. As such, the current rate of distribution may not be repeated in future months.


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## ArmchairHero (Apr 4, 2011)

what's the tax treatment on the HEX and similarly ZWB?


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## el oro (Jun 16, 2009)

The 28.26% yield on HEP looked high but after looking at the call option premiums for the underlying holdings it makes sense. Write a call today for any of the stocks in HEP with strike slightly above current price for May, multiply that by 12 and you get >20% for most of them. Do this for the very volatile SLW and you get >50% "yield". Their strategy is to write calls with strikes at or slightly above the current price. Therefore you'll get a nice payout some months in exchange for very limited capital gains. 

Also, on the fact sheet under distribution frequency it says "monthly, if any", which leads me to believe there may be some months with no yield when the stock prices advance quickly and they have to buy back the calls to avoid forced sale of all the stocks. They would then write new calls but you'd have to wait for the next month for the payout.

Please correct me if I'm wrong. I've never owned a covered call ETF or wrote calls indefinitely with the intention of always holding the stock.


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## andrewf (Mar 1, 2010)

ArmchairHero said:


> what's the tax treatment on the HEX and similarly ZWB?


It should be almost entirely capital gains.


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## gibor365 (Apr 1, 2011)

$1600 Gold by 2011 said:


> Also, on the fact sheet under distribution frequency it says "monthly, if any", which leads me to believe there may be some months with no yield when the stock prices advance quickly and they have to buy back the calls to avoid forced sale of all the stocks. ....
> Please correct me if I'm wrong. I've never owned a covered call ETF or wrote calls indefinitely with the intention of always holding the stock.


I think that you're correct. Covered call ETFs are completely new, and it's difficult to say what will be in future. On other hand, i hold similar ETF ZWB for several months and they paying steady dividend about 10% (that I'm DRIPing every month). Horizons estimates 10% yield on average.
You also right imho "when the stock prices advance quickly ...", but if it happens I'll gain on my other stocks (obviously i don't intend to keep more than 5% of portfolio in such ETF). On other hand , looking on holdings of HEX or ZWB, I have a doubt that prices can advance quickly.

In any case those ETFs looks similar to High Yield bonds


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## gibor365 (Apr 1, 2011)

andrewf said:


> It should be almost entirely capital gains.


I really don't care, hold then in RRSP..

The longest covered call ETF is ZWB Fer 3 inception), so I did rough calculation comparing ZWB to ZEB.
ZEB has higher appprecation 4.8% vs 3%, but ZWB dividend times 2.7 higher...so I got practically the same numbers


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## humble_pie (Jun 7, 2009)

_" gibor, do you have a link to the announcement about the distributions? Those yields seem suspiciously high. It's possible that they were proceeds from more than one month." _

andrew nearly always has sensible cautions & concerns but in the case of existing HEX & bmo's ZWB i do believe that those 9-10% yields will be sustainable in stable, slow-to-moderately-rising, slow-to-moderately-falling, and for a short time in sharply rising markets, with the latter (sharply rising) perhaps to be followed by a month or so of no payout depending upon the managers' strategy with the itm calls. In prolonged sharply falling markets i would expect yield to trend down after 1-3 months.

these managers are selling calls that are 1, or rarely 2, strikes above share price of the underlying. These are more lucrative to sell, therefore provide a higher current yield, and therefore such funds are more appealing to retail investors.

i for one happen to believe that a slightly better strategy in the kind of rising bull market that we have seen for past 25 months is to sell calls that are farther out of the money. This affords more room for the shares to grow up into their strike range, so to speak. The somewhat lower taxable current yield (perhaps 7-7.5%) is more than offset by the untaxed paper capital gains that are still locked within the shares. In addition, the current yield can be boosted to 8-10% by selling otm puts, ie the investor holds shares & sells otm strangles.

this strategy is appealing to the do-it-yourself option investor because it requires less work. Risk of assignment occurs far less frequently (these are the periods, nearly always around dividend x-dates, that require sharp attention if one wishes to avoid assignment.)

in stagnant markets such as we are recently seeing, this investor can adjust his call strikes downwards so they are closer to market. In other words, his strategy then comes to more closely resemble HEX & ZBM.


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## andrewf (Mar 1, 2010)

It was the 25% yield that set off my alarm bells. 10% is high but not exceptional.


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## gibor365 (Apr 1, 2011)

andrewf said:


> It was the 25% yield that set off my alarm bells. 10% is high but not exceptional.


Exactly! Even some telecom stocks (like CEL) have yield more than 10%


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## humble_pie (Jun 7, 2009)

where did you folks find a 25% yield ?

all i ever saw on alphapro's website for hex was about 10%.

i have not recently seen anything higher than 9 something for bmo's bank w options etf. That yield appears in regular quote data bases because those divs have already been paid.


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## gibor365 (Apr 1, 2011)

humble_pie said:


> where did you folks find a 25% yield ?
> 
> all i ever saw on alphapro's website for hex was about 10%.
> 
> i have not recently seen anything higher than 9 something for bmo's bank w options etf. That yield appears in regular quote data bases because those divs have already been paid.


It's for HEE and HEP


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## andrewf (Mar 1, 2010)

gibor said:


> Horizons AlphaPro Enhanced Income Gold Producers ETF HEP $0.14562 (2) 28.26% (2) Monthly


The 28% is the indicated yield based on the distribution annualized.


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## gibor365 (Apr 1, 2011)

andrewf said:


> The 28% is the indicated yield based on the distribution annualized.


I know....I have now only HEX, if their dividends will e in range 10-15%, it's fine with me


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## humble_pie (Jun 7, 2009)

oh my. One can see how this message forum has escalated into hyperactive mode. Not a good sign, imho. Investors become vulnerable when they lose control & turn frantic.

who cares what anonymous posters say on message boards. Alphapro itself initially indicated on their website they were expecting a distribution of slightly more than 10% per annum from HEX. Experience tells me that this is doable, as they are intending to sell calls only slightly above the natural.

the same experience tells me that anybody talking about 28% per annum from the same underlying stocks, or even 15%, is totally off the mark.

where did alphapro ever publish a monthly potential return of .14562 for HEP. This is a brand new fund with no public distribution history.

current documentation from the fund manager shows nothing even remotely as high as the above. Documentation does suggest a return in the 9% range.

did somebody here make this .14562 figure up ? we are witnessing an outbreak of virulent pumping all over this forum at present. Has the virus now spread even to sedate, previously pump-proof hosts like etfs.


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## gibor365 (Apr 1, 2011)

humble_pie said:


> where did alphapro ever publish a monthly potential return of .14562 for HEP. This is a brand new fund with no public distribution history.


Oh, my...
Larry81 already gave TDW link:
https://research.tdwaterhouse.ca/research/public/Markets/NewsArticle/100-109c9361-1

another one on Yahoo finance
http://ca.finance.yahoo.com/news/ALPHAPRO-ANNOUNCES-APRIL-2011-cnw-1357092345.html?x=0&.v=1

this one from Horizons
http://www.horizonsetfs.com/Pdf/PressReleases/20110419_Distributions.pdf


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## humble_pie (Jun 7, 2009)

gibor thank you, it's the company source i'd want, not the tdw or any other broker source. And yes, the company said last night that it's paying an (insanely high) (just my opinion) dividend for its new option equity funds HEX & HEP to unitholders of record on april 29/11.

the only sense this makes to me is quite cynical. They wrote their options & collected payment, not during the beta-testing phase of the new instruments, but waiting instead until the days immediately following the public launch, so that all the revenues from all the call sales would be reflected in the audited accounts & would be immediately streamed through to the shareholders.

this will have the effect of hugely inflating the dividend return from these funds in all data bases. We can already see this.

the reported high yields will, in turn, attract hordes of income-seeking new investors to purchase these instruments. We are now seeing estimated annual yields of 20.86% for HEX & 17.46% for HEP, depending which data base one reads.

if future monthly distributions will be considerably less (and please note that there is a note to the effect that this could happen) nevertheless all reporting data bases will take months to adjust the dividend yields downwards. In other words, for months & months to come, HEX & HEP have, with this single bold step, bought themselves pride of place as top yields among canadian etfs in all major data bases such as thomson reuters & other systems.

it was all perfectly legal. Perfectly brilliant.

in fact, if amassing & paying out a gigantic distribution in the first month of life was the planned strategy, the funds might even have sold options that are farther out in time, so as to earn & pay out higher premiums upfront.

one could even argue that longer positions had to be struck because the fund managers are near-term bearish for the early summer months, therefore it was strategic to harvest the high premiums now, before share prices sink.

me, i am sticking to my knitting & saying that over an entire year's cycle these etfs should likely distribute something like 10%. That in itself would be excellent. I would regard the gold fund as somewhat more vulnerable than HEX, which is the top toronto 30, in the event we should see a severe commodity & precious metals correction.


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## webber22 (Mar 6, 2011)

Humble that's a good point. For what it's worth, there are some US ETF's for covered calls that have been around for about 4 years. They under-performed the index, however the yield is not taken into account 

PowerShares S&P 500 BuyWrite Portfolio (PBP) 
Nasdaq-100 BuyWrite Portfolio (PQBW)

http://etfdb.com/2010/do-you-need-a-covered-call-etf/


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## humble_pie (Jun 7, 2009)

webber can you tell us more ?

did you hold either ? and if so, why did they underperform their index, did you think.

thanx for info.


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## webber22 (Mar 6, 2011)

I didnt own these but did a quick comparison now. The covered call funds equalled a declining index, underperformed when prices soared, and did not fall as far when things declined. Its funny that the difference in most cases is 10-15%, the current target of the HEX ETF yield, so its a wash in the end. That might explain the low popularity of the US funds 

PBP vs SPY(S&P 500 ETF): 
1 yr PBP -1.12% SPY 11.09%
3 yr PBP -15.7% SPY -3.89%
4 yr PBP -14.28% SPY 1.64%

PQBW vs QQQQ(Nasdaq-100)
(similar results)


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## andrewf (Mar 1, 2010)

Are those total returns? Since the beginning of 2008, PBP has had a total return of -13% vs.-1.9% for SPY. So, it's trailed by about 3% per year in total returns.

To be fair, we had wicked volatility during that period.


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## gibor365 (Apr 1, 2011)

humble_pie said:


> me, i am sticking to my knitting & saying that over an entire year's cycle these etfs should likely distribute something like 10%. That in itself would be excellent. I would regard the gold fund as somewhat more vulnerable than HEX, which is the top toronto 30, in the event we should see a severe commodity & precious metals correction.


That exactly what I was talking about Future will show, but 10% average it's fine with me... 

I don't get it but PBP has yield 1.2% it's not even close to 9.5% of ZWB ...

About HEX it's too early to say, but from inception it outperfomed XIU...


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## webber22 (Mar 6, 2011)

The yield for ZWB of 9.5% is misleading because of a number of things. 
First, the yield has been inflated as Humble explained earlier - going forward unless the stock continues to rise the yield will fall since it was 'front loaded' - only time will confirm this. 

Second, the distributions bring down the share price on the ex-date by the amount of the dividend - the dividend is not an extra return of 9.5%. 

Third, TOTAL returns including distributions have underperformed the TSX financial index by about 2%.


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## humble_pie (Jun 7, 2009)

_" ... the distributions bring down the share price on the ex-date by the amount of the dividend - the dividend is not an extra return of 9.5%."_

but this is true of all dividends on all stocks.

they notionally reduce value of a stock prior to market open on X date. Immediately upon market open, market forces rush in & drive stock up or down according to the day. Same happens to this bmo etf when it goes X once a month. 

it's the market price of the bank stocks held within this etf that determine its unit value, with minor aberrations occurring each month around the dividend X date.

ps (to webber) it was the horizon hi-div payors HEX & HEP i was posting about. Never mentioned bmo's bank option etf at all.


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## humble_pie (Jun 7, 2009)

ZWB underperform tsx fin index by 2% ?

afraid i cannot agree. ZWB debuted in early february. If one compares charts they are almost in lockstep with ZWB leading by a fraction of a percentage. Since zwb debut date they have both risen by approximately 4%.

ZWB leads strongly if distributions are to be recognized. The index does not distribute. However ZWB is barely 2 months old, so it seems premature to discuss its performance except to say this is acceptable to date.


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