Today Horizons ETFs has rolled out an actively managed ETF that targets dividend yield and quality while implementing an options strategy. The Horizons Cadence Hedged US Dividend Yield ETF (USDY) is designed to seek “income and long-term growth of capital,” according to its prospectus.
The fund comes with an expense ratio of 0.68% and lists on Cboe Global Markets, the parent company of ETF.com.
USDY is a sort of Swiss Army knife for a portfolio. According to Horizons U.S. Managing Director Garrett Paolella, the fund has four purposes: to offer market participation via its equity portfolio; to reduce volatility; hedge downside risk via an options collar strategy; and to pay an above-average dividend.
“We want to protect investors from significant drawdowns in the market, but we want to provide them with a portfolio in the meantime that has a lower volatility than the market and an above-average dividend,” Paolella said.
The fund is subadvised by Cadence Capital Management, an institutional manager with roughly $4.6 billion in assets under management that has extensive experience managing yield-oriented equity strategies. Cadence manages the fund’s equity portfolio.
The ETF primarily invests in large-cap U.S. stocks that would typically be found in the Russell 1000 and also have a history of dividend growth. The companies in the portfolio are also generally of high quality, as represented by criteria such as their balance sheets, earnings, cash flow and dividends, the prospectus notes.
Cadence uses a quantitative approach to start with. The firm ranks the stocks falling within its size range based on dividend-related and quality criteria. From there, it selects 200-450 securities and weights them using an adjusted market capitalization approach that caps individual security weights at 1.25% of the portfolio.
Given that this is an actively managed fund, the subadvisor can adjust weights as needed to meet the fund’s goals. Generally, the portfolio will be reconstituted and rebalanced on a quarterly basis, but only if the subadvisor deems it necessary, according to the document.
“Dividend investors are searching for yield at the moment in a variety of different ways, and trying to reduce interest rate risk. Dividends are obviously a very attractive and tax-efficient way of doing that,” said Paolella. “Once we have our equity, which is the core part of the strategy, we use up to 30% of the portfolio for options.”
Horizons, as USDY’s advisor, can buy and sell call and put options on indexes that have high correlations with the portfolio in order to mitigate downside risk. The prospectus notes that the options overlay is actively managed so that it can respond to market conditions and any changes in the equity portfolio.
“We actually deploy a collar strategy, which is basically selling an out-of-the money call, taking the proceeds from that call to then buy an out-of-the-money put in order to hedge part of our market exposure and potential sell-off,” Paolella said.
Contact Heather Bell at [email protected]