A new filing from Cambria Funds outlines the firm’s plans for an options-strategy ETF. The Cambria Covered Call Strategy ETF will be actively managed and invest primarily in other funds, including ETFs, exchange-traded notes and closed-end funds.
The fund’s stated goal is to generate absolute returns while lowering volatility and protecting itself against downside risk.
In addition to investing in other similar types of vehicles, it will write covered-call options on each of those vehicles. The options will have strike prices ranging from at-the-money to 3% out-of-the-money, with a proprietary methodology determining the strike prices and premiums, the prospectus says.
The document further notes that the covered calls will lower the fund’s volatility and provide a steady income stream due to the premiums. Although it says the strategy is an important source of return, the prospectus also points out that the fund will not see as much upside when its holdings increase in value.
The fund can invest in all of the major asset classes, including stocks, bonds, real estate, commodities and currencies, but the prospectus says that Cambria intends to rebalance the portfolio to target allocations every quarter and warns of the possibility of high turnover.
There are currently eight covered-call ETFs listed on the U.S. market, the largest of which is the PowerShares S&P 500 BuyWrite Portfolio (PBP), which has nearly $330 million in assets under management. However, all of the available covered-call ETFs are index-based and are not actively managed.
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