For Income, ETF Eyes Covered Calls

09/21/2015 9:00 am EST

Focus: ETFs

Doug Fabian

Editor, Successful ETF Investing, ETF Trader's Edge, Weekly ETF Report, and ETFU.com

Even in market areas that are underperforming, there always are some stocks and funds that hold up better than the rest, demonstrating remarkable relative strength, explains Doug Fabian, editor of Successful ETF Investing.

US dividend and income equity exchange-traded funds generally were hurt badly during the first half of 2015, but there still have been some relative stars in the category.

One of these funds is First Trust Low Beta Income ETF (FTLB), the second-best-performing fund of this type in the year’s first six months.

This fund differs from ones investors typically would expect to find under the income-based categorization. Unlike many other dividend funds, FTLB does not focus on stocks that pay dividends.

Instead, it buys large-cap, big name stocks, some of which pay dividends and some of which do not.

About 23% of this fund’s assets are invested in its top ten holdings. Among them are Apple (AAPL), Verizon (VZ),  General Electric (GE), Wal-Mart Stores (WMT), and Exxon Mobil (XOM).

Then it executes its options strategy, selling covered calls on its positions to generate income for its shareholders by collecting premium payments for its selling the options.

This strategy seems to have paid off, relatively speaking, given the largely stagnant markets during the first half of the year. This fund was able to return 0.69% while also yielding 3.51%.

FTLB is tiny, with only $4 million in assets managed. As this fund has less than $100 million in assets, it falls beneath my recommended threshold for investment.

However, this fund’s strategy is one that is worth bringing to your attention. The more knowledge you have as an investor, the better you can make informed decisions.

This fund bucked the trend and actually gained value in Q2, a time when many of its peers experienced setbacks.

If you are interested in seeking income using a covered-call strategy, First Trust Low Beta Income ETF represents a way to accomplish this without having to write the calls yourself and the fund boasts a solid track record.

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