Product news: Leverage, covered calls and more money market funds

As ETFs using covered calls remain popular among investors looking for income and downside protection, two more manufacturers have introduced funds providing exposure to the U.S. market.

Horizons ETFs Management (Canada) Inc. and Evolve Funds Group Inc. released new ETFs this week that write covered calls on holdings of U.S. large caps. The Horizons fund, which also uses leverage, is part of a new suite of “enhanced” ETFs.

With the new funds, Horizons said it’s targeting the three categories that account for roughly one-third of all ETF assets in Canada: big U.S. stocks, big Canadian stocks and Canadian banks.

The Horizons Enhanced US Large Cap Equity Covered Call ETF (TSX: USCL) provides exposure to large U.S. companies through another Horizons ETF while boosting income through covered calls. The fund will also seek to enhance returns by employing 1.25x leverage through cash borrowing. Its initial target annualized net yield is 14%.

Two of the funds in the new suite offer exposure to Canadian large caps: one (TSX: CANL) using 1.25x leverage on the S&P/TSX 60 index, the other (TSX: CNCL) employing both 1.25x leverage and covered calls to boost returns and generate income on a basket of large-cap Canadian names.

Evolve’s new fund is an unhedged U.S.-dollar version of its $39.5-million S&P 500 Enhanced Yield Fund (TSX: ESPX) released in January, which provides exposure to the S&P 500 index while mitigating risk by writing covered-call options on up to 33% of the portfolio. Evolve had launched another fund (TSX: ETSX) at the same time using the same strategy for the S&P/TSX 60 index, and it has $14 million in assets.

Horizons’ new suite also includes leveraged (TSX: BNKL) and covered-call ETFs (TSX: BKCL) focused on Canadian banks. And the firm released a standard equal-weight banks index ETF (TSX: HBNK) whose 0.09% management fee will be rebated to zero for its first year.

Last year, option-based ETFs saw record inflows of $4.4 billion, according to National Bank Financial, as investors sought income and safety in a down market. However, National Bank warned that investors in covered call funds “should learn about the possibility of reduced upside participation, higher costs and the complexity that comes from active option management.”

Management fees on Horizons’ enhanced suite range from 0.35% for the leveraged products to 0.65% for those using covered calls. Evolve’s management fee for its broad market advanced yield funds is 0.45%.

ETFs focused on the financial sector have far exceeded flows to other equity sectors this year, bringing in $1.4 billion in the first six months, according to National Bank.

More cash products

As cash alternative investment products continue to dominate fund flows and regulators take a closer look, CI Global Asset Management is reducing fees in the space and planning to launch a couple of additional options.

CI GAM filed prospectuses for two new money-market ETFs it hopes to launch later this month: the CI Money Market ETF (TSX: CMNY) and the CI U.S. Money Market ETF (TSX: UMNY.U). The funds will invest in money-market instruments that mature in less than a year, with management fees of 0.14%.

CI has been a big winner in the cash alternative fund space. The CI High Interest Savings ETF brought in $3.2 billion last year, more than any other ETF, according to National Bank Financial. The ETF’s popularity has continued in the first half of this year, once again topping the leaderboard with $2.2 billion in net flows.

The popularity of high-interest savings account funds has drawn the attention of regulators. The Office of the Superintendent of Financial Institutions (OSFI) is reviewing banks’ liquidity adequacy requirements as it considers whether new categories of wholesale funding are needed to reflect potential risks. Beginning Aug. 1, wholesale funding from financial institutions must classify deposits from HISA ETFs as if they will fully “run off,” which could lead banks to reclassify deposits from HISA ETFs — and lead to lower interest rates for the funds.

In the wake of the uncertainty around high-interest savings account ETFs, some fund companies — like CI GAM — have introduced new money-market products. Horizons introduced ETFs focused on very short-term government bonds in April, and Evolve released money-market funds in May.

CI is also reducing fees on the CI Money Market Class, the CI Money Market Fund, the CI US Money Market Fund, the CI Short-Term Corporate Class and the CI Short-Term US$ Corporate Class to 0.14% for series F and series P (previously fees in the two series ranged from 0.25% to 0.75%) and to 0.39% for series A (down from 0.70%). The firm is also eliminating other series of the funds.

New Shariah fund

Mackenzie Investments this week launched the FuturePath Shariah Global Equity Fund, an actively managed mutual fund that provides access to Shariah-compliant investing. The fund focuses on developed markets and excludes companies in the alcohol, tobacco, pork, and conventional banking and insurance sectors, among others. The fund is exclusively available to Primerica Financial Services Ltd. advisors as part of a partnership launched last year.