Global X Introduces New Covered Call ETFs for Midstream Energy and Dividend Stocks

Two new exchange-traded funds (ETFs) have been launched by Global X ETFs, both utilising options to provide additional income to investors. The Global X MLP & Energy Infrastructure Covered Call ETF and the Global X S&P Quality Dividend Covered Call ETF will offer covered call strategies on existing Global X funds focused on midstream energy and dividend-paying stocks, respectively. The popularity of covered call ETFs has grown significantly in recent years, with net assets in the “derivative income” sector currently totalling $70.7bn, up from $44.5bn the previous year according to Morningstar Direct. The introduction of these new funds brings the total amount of new products launched this year by Global X to 11, compared to just 10 in 2022 and 25 in 2023. The fees for the new funds will be 0.60% for the midstream energy covered call ETF and 0.35% for the S&P Quality Dividend Covered Call ETF. Covered call strategies involve writing call options on existing holdings, with the aim of earning a premium from the sale of these options. However, some analysts have expressed caution regarding the adoption of such strategies, with Morningstar’s Katherine Lynch suggesting in a report published last year that the approach may not be appropriate in times of rising markets, as it involves sacrificing potential upside in favour of income. Bryan Armour, ETF strategist at Morningstar, also raised concerns about the use of covered call strategies in narrow investment strategies.