VTWO - RYLD Continues To Distribute Double-Digit Yields While Keeping Pace With The Russell

Summary

• RYLD has stayed in lockstep with VTWO during the downturn in 2022.
• Since its inception in 2019, an investor would be in positive territory regardless if they took the distributions as cash or reinvested them.
• I crunched all of the numbers and illustrated where an investment in RYLD would be if you had taken the distributions or reinvested them since inception.

2022 is almost over, and the overall markets have left many investors feeling unsatisfied. The SPDR S&P 500 Trust ( SPY ) has declined -19.84% YTD, while the Invesco QQQ ETF ( QQQ ) has fallen -33.44%, and the Vanguard Russell 2000 ETF ( VTWO ) has been caught in the middle, declining -22.72%. The S&P and Russell continue to enter and exit bear market territory, as the Nasdaq feels as if it remains in a perpetual state as it's lost a third of its value in 2022. Covered Call ETFs became increasingly popular in 2021, and they continued to generate large amounts of income throughout unexpected volatility in 2022. The Global X Russell 2000 Covered Call ETF ( RYLD ) has kept pace with its respective index, as it declined -22.72% compared to VTWO, declining -22.53% in 2022. The appeal of the large distributions didn't dissipate during the chaos of the markets, as they became a strong investment case for these types of ETFs. Most investments declined in 2022, big tech got hammered, and Apple ( AAPL ), which generated $99.8 billion of net income in its 2022 fiscal year, declined by -27.35% YTD. RYLD's Covered-Call methodology didn't lead to its demise and has produced a trailing twelve-month ((TTM)) distribution yield of 14.75%. The bear market proved Covered Call ETFs such as RYLD wouldn't implode, and they would still generate the attractive yields that investors expected. We have 43 months of data since RYLD was created, and this ETF has lived up to expectations from an income perspective.

RYLD recovered after the Covid-Crash, and it should recover once again

During the Covid-Crash, RYLD declined -41.82% from 2/14/20 thru 3/18/20, as it lost -$10.71 of value. By 7/9/21, shares had recovered to $25.56 as RYLD came within $0.05 cents of its previous levels, and in November, shares exceeded where they were on 2/14/20, right before the Covid-Crash. The same way that RYLD's structure of using a buy-write strategy to write covered calls on the Russell 2000 index didn't cause RYLD to implode during the bear market of 2022, it didn't prohibit RYLD from recovering after the Covid-Crash.

The bear market isn't over, and nobody can predict if stocks will be positive in 2023. RYLD hasn't declined past its 2020 lows and has already proven it can recover from where it resides today. RYLD's recovery depends on the market, but if you believe the markets will recover in 2023 or 2024, then there is a good chance RYLD will appreciate with the markets. In the meantime, RYLD hasn't missed a monthly distribution as its established a track record of paying distributions for 43 consecutive months. I don't know when the markets will recover, but I am bullish on the point that history will repeat itself and RYLD will eventually recover while continuing to generate monthly income for investors.

RYLD has declined -24.2% since its inception, but it's been a net positive investment regardless if you take the distributions as cash or reinvest them.

The debate between taking the income or reinvesting the distributions doesn't have a clear-cut answer, as it's a matter of personal preference. I crunched the numbers to illustrate how both methodologies would have worked out since RYLD's inception. Regardless of which methodology is correct for your investment thesis, both methods would have a positive ROI since RYLD's inception. Shares of RYLD hit the market at $25, and since then, it's generated $9.44 in income from 43 consecutive distributions.

If you had purchased 100 shares of RYLD on 4/17/19, your initial investment would be $2,500. As shares currently reside at $18.95, the initial decline is -$605, which is a -24.20% ROI. The 100 shares of RYLD generated $943.58 in income. If you had decided to take the income as cash, this would be a 37.74 yield on the initial investment. When the $943.58 from distributions and -$605 in capital loss are netted out, the total ROI is 13.54%, as there is $338.58 in total profit remaining. Over the TTM, RYLD has generated $265.70 in distributions, placing the forward yield on your initial investment at 10.63% and 14.02% on the current price. While shares have declined, RYLD's income has made up for 100% of the capital depreciation and then some. An aspect that investors who are negative on these types of funds seem to forget is that this is still an investment that is generating continuous income with the prospects for capital appreciation when the market turns. If you don't need the underlying capital, then it shouldn't matter what the price fluctuations are, as this has become a vehicle to generate income. We have seen that RYLD can recover with the market and that it will generate large amounts of income in bull and bear markets.

So how does the math change if you decided to reinvest the distributions? By reinvesting the distributions, RYLD would have generated an additional $216.13 in income, increasing its yield on investment by 8.65% to 46.39%. The initial share base would have increased by 51.25 shares, and the overall investment would have generated $1,159.70 in income. Today, your investment would be worth $2,866.14, and there would be a total ROI of 14.65%, as the profit would be $366.14. The additional 51.25 shares would increase the projected annual income by $136.16 based on the TTM distributions of $2.66. The forward yield on investment would be 15.44%.

There is no correct answer, but I prefer reinvesting the distributions

Everyone has a different investment thesis. Regardless if you allocated money toward RYLD to generate additional supplemental income or if you reinvested the distributions to build a future stream of income, there isn't a wrong investment premise. People invest for different reasons, and there isn't a one size fits all strategy.

Personally, I am reinvesting every distribution that flows into my account. RYLD is a component of my overall income strategy from investing and reinvesting the distributions allows me to grow this income stream over time. At the end of the day, the results from reinvesting the distributions is more enticing for me than taking the income and finding somewhere else to put the capital. In less than 4 years, RYLD has generated 51.25% of its shares by reinvesting the distributions. If I needed the capital for some unexpected reason, I could sell the 151.25 shares, assuming that I had purchased 100 shares when it went public, and I would have $366.14 in profit. If I was able to continue compounding the distributions, I would be generating an additional 45.25% in projected annual income compared to if my share base stayed at 100 shares. Over the next 12 months, I would be projected to generate $385.92 in income rather than $265.70. Shares have declined significantly since its initial price, but I would still be in a profitable position if I was forced to sell, and if I was able to keep the investment, it would generate over 15% yields from my original invested capital. As I am nowhere near retirement, reinvesting the distributions is a better methodology for me.

Conclusion

I have crunched the numbers, and RYLD fits into my investment thesis. The bear market was unsuccessful in exposing flaws in RYLD's investment strategy, as it has been in lockstep with its underlying index, proving many bear cases incorrect. RYLD isn't an investment that will mimic the markets in an uptrend, as it's capping its upside potential by selling covered calls and paying the premiums to investors. If your focused on capital appreciation, covered call ETFs probably aren't the best investment vehicles to focus on. If you're an income investor or have an income side of your portfolio, RYLD is an interesting ETF that has a proven track record of generating double-digit yields for its investors.

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