As we move through this period of uncertainty, investors have been shifting their view from being "growth" oriented to being focused on "total return," which is the classy Pooh Bear way of saying, "I'll take what I can get."
Total return, of course, refers to the combination of price return and income. From an equity perspective, income comes from dividends but for some issuers, income has increasingly come from option premium in the form of covered call or buy-write strategies. Issuer Global X has some funds that I thought would be interesting to review, if only to discuss basic buy-write strategies and also some of the math behind yield calculations. Let's check out three funds here.
Buy Write
The funds in question are the Global X S&P 500 Covered Call ETF (XYLD) , the Global X Nasdaq 100 Covered Call ETF (QYLD) and the Global X Russell 2000 Covered Call ETF (RYLD) . XYLD and QYLD were launched in 2013 and have been successful products for Global X with $1.94 billion and $7.24 billion in assets under management, respectively. RYLD was launched in 2019 and currently sits at $1.37 billion in assets under management. All the funds have a 60-basis point expense ratio, although RYLD shareholders currently benefit from a fee break, which will expire on March 1, 2023, and will push that fund's expense ratio to 70-basis points. These rates translate to a dollar cost of $6.00 for every $1,000 invested over a calendar year.
The strategies for these funds are straightforward, with each fund tracking the underlying index and writing (selling) one-month forward call options on the underlying index. For example, XYLD holdings include long investments in 504 components of the S&P 500 Index, and being short (writing or selling) 4,995 SPX 3,850 strike call options expiring on Aug. 19. The option position currently accounts for roughly 7.50% of the overall portfolio. QYLD has written about 10% of its portfolio in August expiry Nasdaq 100 Index contracts and RYLD has sold about 12% of its portfolio against august expiry Russell 2000 Index calls. These positions are rolled every month and the new strikes are set at the closest to the closing price of the underlying index, or the At-The-Money (ATM) strike price. For more insight into the methodologies for these funds, you can follow these links to the Cboe S&P BuyWrite Index, the Cboe Nasdaq-100 BuyWrite Index, and the Cboe Russell 2000 BuyWrite Index.
Yield Calculation 101
As you can tell from the table below, the yields on these products are impressive and go a long way to explaining their popularity. One note about yield calculations is that there are a few different ways to calculate dividend yields. Recognizing this, the Securities and Exchange Commission developed the SEC 30-Day Yield measure, which is calculated by taking all fund income generated in the past 30 days, subtracting any accrued fund expenses, and applying the net figure to fund assets under management. While this measure works very well for money market and other short-term bond funds, it is not ideal for equities or other assets that may pay out on a longer or lumpy schedule.
Source: Factset, All You Can ETF
Equity funds generally use one of two approaches to present yield figures. The first is the 12-Month Trailing Yield, which sums up all the regular dividend payments made by the fund in the past 12 months and applies them against the current fund assets under management/share price. The second approach (Distribution Yield) is to take only the last dividend payment made by the fund, apply it against the current assets under management/share price and annualize that figure. Distribution Yield requires less data, and is easier to calculate, and by some accounts is a better representation of the current yield capability of a fund. Distribution Yield tends to be referenced more often, although you should be able to find all three calculations on an ETF issuers website.
Wrap It Up
As you can see from the table above, putting the cumulative returns for these funds against funds tracking the underlying indexes are comparable. These are the price returns for these products and should be expected. Adding the cumulative price returns and Distribution Yields will get you in the ballpark of the total return for these funds.
In the case of XYLD, year-to-date to Aug. 22 total returns are -6.65% as compared to -12.40% for the SPDR S&P 500 ETF Trust (SPY) ; QYLD posts -10.70% as compared to -19.14% for the Invesco fund (QQQ) ; and RYLD is down 6.77% as compared to Russell fund's (IWM) 12.92% loss for the period. So far this year these strategies have been working and assuming we continue to move through this period of uncertainty with slightly elevated volatility and lack of a true bottom in this market, I don't see why they wouldn't continue to perform. If you think we are heading toward a period of sideways markets and elevated risk (higher option premiums) then perhaps these funds are worth a closer look.
