Global X adds emerging markets ETF to covered call suite

Nov 13th, 2023 | By | Category: Alternatives / Multi-Asset

New York-based Global X has expanded its suite of covered call strategies with the launch of the Global X MSCI Emerging Markets Covered Call ETF (EMCC US).

Rohan Reddy, Director of Research at Global X

Rohan Reddy, Director of Research at Global X ETFs.

Listed on NYSE Arca with an expense ratio of 0.60%, the fund is linked to the Cboe MSCI Emerging Markets IMI BuyWrite Index.

The index consists of a long position in the MSCI Emerging Markets Investable Market Index combined with a systematic covered call overlay.

With 3,414 constituents, the MSCI Emerging Markets Investable Market Index captures large, mid, and small-cap representation across 24 emerging market countries. The ETF obtains its long exposure to the index by investing in the iShares Core MSCI Emerging Markets ETF (IEMG US).

A covered call is an options strategy whereby an investor holds a long position in an asset and sells or “writes” call options on that same asset in an attempt to generate more income (the additional income from option premium) than the asset would otherwise provide on its own from dividends or other distributions.

In terms of EMCC’s strategy, the fund writes a succession of one-month at-the-money call options on IEMG corresponding to 100% of the value of its portfolio.

Historically, during bear markets, range-bound markets, and modest bull markets, covered call strategies have generally outperformed their 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.

Compared to developed markets, covered call strategies based on emerging market equities typically generate higher premiums due to the segment’s inherent volatility; however, the occurrence of strong bull markets may be relatively more frequent.

Rohan Reddy, Director of Research at Global X ETFs, commented: “While China has faced macroeconomic challenges, other key emerging markets have rebounded since the Covid-19 pandemic, especially as major headwinds such as central banks’ hawkishness have receded while tailwinds such as infrastructure investments have picked up. Through an options-based approach, EMCC offers investors access to a diverse set of geographies which offer potentially compelling yields amid a mixed range of performances.”

Global X’s ‘Income’ suite now consists of more than two dozen ETFs with around $19 billion in collective assets under management. The line-up includes covered call strategies based on the S&P 500, Nasdaq 100, DJIA, and Russell 2000 indices, as well as strategies based on ESG-tailored versions of the S&P 500 and Nasdaq 100.

The firm also offers an extensive line-up of ‘Covered Call & Growth’ ETFs which provide long exposure to mainstream equity indices while writing call options on the same indices corresponding to 50% of the value of the fund’s portfolio.  The strategy, therefore, aims to provide regular income while still allowing investors to capture half the upside potential of the underlying index.

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