First Trust has expanded its partnership with options specialist Cboe Vest Financial with the launch of a covered call strategy on gold.
The ETF offers exposure to gold while sacrificing some upside potential in return for current income.
The FT Cboe Vest Gold Strategy Target Income ETF (IGLD US) has listed on Cboe BZX Exchange and comes with an expense ratio of 0.85%.
The fund is actively managed by Cboe Vest, which also acts as sub-adviser to First Trust’s suite of Target Outcome ETFs.
IGLD gains exposure to gold by investing in a portfolio of Treasury securities and FLexible EXchange (FLEX) Options on the $60 billion SPDR Gold Trust (GLD US), the largest gold ETP globally.
FLEX options are customizable exchange-traded option contracts guaranteed for settlement by the Options Clearing Corporation
The fund then seeks to generate income by selling short-term options (generally with one-month remaining to maturity) on GLD. The strategy targets a consistent level of income that, on an annual basis, exceeds the yield on one-month US Treasury securities by at least 3.85%.
Through this covered call strategy, the fund essentially sacrifices a portion of the potential upside of GLD in return for current income from option premiums.
Historically, during bear markets, range-bound markets, and modest bull markets, covered call strategies have generally outperformed the underlying securities. However, during strong bull markets, when the underlying securities may frequently rise through their strike prices, covered call strategies historically have tended to lag.
Ryan Issakainen, Senior Vice President, ETF Strategist at First Trust, said: “Historically, gold has been an important tool for many investment advisors seeking to enhance diversification within their clients’ investment portfolios, while also providing a potential hedge against inflation. We believe this ETF will be useful not only for pursuing those objectives but also as an income strategy.”
Karan Sood, CEO of Cboe Vest, added: “For some investors, the biggest criticism to gold has been the lack of yield. IGLD seeks to change that. We are excited that investors are now able to potentially derive income from gold while still retaining participation in its growth potential.”
IGLD is the second gold fund from First Trust this year. In January, it launched the FT Cboe Vest Gold Strategy Quarterly Buffer ETF (BGLD US) which uses a combination of FLEX options on GLD to provide exposure to gold while protecting against losses between 5% and 15% and capping upside performance over a one-year outcome period.