QRMI - XRMI Vs. QRMI: 2 Risk-Managed ETFs Have Not Proved Themselves (Yet)

Summary

• The Global X S&P 500 Risk Managed Income ETF invests based on the Cboe S&P 500 Risk Managed Income Index.
• The Global X NASDAQ 100 Risk Managed Income ETF invests based on the Nasdaq-100 Monthly Net Credit Collar 95-100 Index.
• Both ETFs and their respective indices are reviewed. Risks and returns are compared against similar option-writing ETFs.
• So far, I give both ETFs a Hold rating after doing those comparisons. Risk reduction working; returns lagging competitors.

(This article was co-produced with Hoya Capital Real Estate )

Introduction

An ideal equity ETF would be one that reduced drawdowns with limited upside loss so total return outperformed a standard equity ETF in terms of risk and return. There are dozens of ETFs on the market trying to achieve those dual goals that go against the prime investment understanding that more return requires more risk. One common attempt is combining equity exposure with various option strategies, such used by the two relatively new ETFs covered here:

• Global X S&P 500 Risk Managed Income ETF ( XRMI )
• Global X NASDAQ 100 Risk Managed Income ETF ( QRMI )

Each is trying to provide the described benefits to investors compared to ETFs based on the underlying stock index or existing option-writing ETFs. So far, I give both ETFs a Hold rating after doing those comparisons. Risk reduction working; returns lagging competitors.

Global X S&P 500 Risk Managed Income ETF review

Seeking Alpha describes this ETF as:

The investment seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the Cboe S&P 500 Risk Managed Income Index . The underlying index measures the performance of a risk managed income strategy that holds the underlying stocks of the S&P 500® Index and applies an options collar strategy (i.e., a mix of short (sold) call options and long (purchased) put options) on the S&P 500® Index. XRMI started in August 2021.

Source: seekingalpha.com XRMI

XRMI has just over $25m in AUM, making it very small. The managers charge 60bps in fees, a common level for an option-writing ETF. The TTM Yield is a very healthy 12.7%.

Index review

Being an index-based ETF, having some understanding of the index rules helps investors understand how the portfolio can change. The index managers describe their index as:

The Cboe S&P 500 Risk Managed Income Index is a passive strategy which consists of:

• holding the S&P 500 portfolio and collecting dividends,
• buying 5% out-of-the-money SPX puts that expire on the monthly cycle,
• selling at-the-money SPX calls that expire on the monthly cycle. The options are “rolled” at SPX expirations, usually on the third Friday of the month.

The Cboe S&P 500 Risk Managed Income Index portfolio was first assembled on March 19, 2004.

Source: cdn.cboe.com Index

XRMI holdings review

I captured this as the February options were about to expire.

With the S&P 500 Index closing at 4075, the Calls had to be bought back, the Puts expired OTM on both sets of contracts. The values the day before expiration were (SPX moved little the next day).

It might have cost XRMI just over $1.1m to close out their option positions. Without knowing the net premiums received/paid, I cannot tell if the strategy made money on this set of options, but using March data related to the new options written, I estimate XRMI lost about $700k on the strategy for the month. They have rolled to the new contracts now.

The SPX closed near 4069 on 2/17/23 when the roll probably occurred, little changed from the 16th. A drop below about 3834 would be needed to make the Put trades profitable. A close above 4155 would mean the Call option trades will lose money.

The stock holdings match what one would see if they held the SPDR S&P 500 ETF ( SPY ).

XRMI distribution review

Considering most of the payout income comes from option premiums, the payouts have been fairly level. Option premiums are correlated to market risk and being an ETF, that doesn't vary as much as perceived risk on individual stocks do. Tax information shows 85% of the 2022 payouts were from ROC, very common for option writing ETFs. That differs little from 2021 and the initial payouts in 2023.

Global X NASDAQ 100 Risk Managed Income ETF review

Seeking Alpha describes this ETF as:

The investment seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the Nasdaq-100 Monthly Net Credit Collar 95-100 Index . The underlying index measures the performance of a risk managed income strategy that holds the underlying stocks of the NASDAQ 100® Index and applies an options collar strategy (i.e., a mix of short (sold) call options and long (purchased) put options) on the NASDAQ 100® Index. QRMI started in August 2021.

Source: seekingalpha.com QRMI

QRMI is even smaller, under $9m in AUM. They also incur 60bps in fees and have a TTM yield of 10.4%.

Index review

The option process is outlined as such.

QRMI holdings review

I was able to capture the February options for this ETF too, and the results were just as poor.

The new options are:

Based on where the Index trade Friday, it appears the roll occurred at the low for the day and by the close the Call options were ITM. My estimate is a price above 12675 will cost QRMI on the Calls, and price below 11570 is needed to profit from the Put trades.

The top stock holdings match what an owner of the Invesco QQQ Trust ( QQQ ) would see.

QRMI distribution review

With the options rolling mid-month, looking at monthly did help identify why certain monthly payouts were down. in 2022, 100% of the payouts were ROC.

Comparing ETFs to competitors

First, I will compare XRMI to both the popular JPMorgan Equity Premium Income ETF ( JEPI ) and another GlobalX ETF that uses a wider collar, the Global X S&P 500 Collar 95-110 ETF ( XCLR ), which would capture more upside. For comparison purpose, I included the SPDR S&P 500 ETF ((SPY)).

There are other funds that could have been used, but of these, XRMI places third, fourth counting SPY. If your goal was risk-managed equity exposure, XRMI delivered the lowest StdDev, but it came with costs in terms of return.

Now, I will do the same for QRMI, this time including the Nuveen Nasdaq 100 Dynamic Overwrite Fund ( QQQX ), the Global X NASDAQ 100 Collar 95-110 ETF ( QCLR ), and the Invesco QQQ Trust ((QQQ)).

At least here, QRMI did better than QQQ, but not as well as either of the other ETF option-writing NASDAQ ETFs did.

Again, QRMI delivered on the StdDev scale but overall return is hurt by the ATM Call strategy employed when the big NASDAQ stocks are rising.

Portfolio strategy

Since I like to execute my own Cash-Covered-Put strategy, the only ETF I own that has major exposure to an option strategy is the JPMorgan Equity Premium Income ETF mentioned above. I have reviewed others and have generally found such funds comes with three differences than the basic ETF covering the same index, these being:

• Higher income generation, which selected investors desire
• Lower StdDev, resulting in a smoother ride some retired investors, like me, appreciate.
• But lower total returns.

Looking at the three, it then becomes a matter of how much better the first two are versus the loss from the third point; then seeing how that fits one's investment goals. While I cannot see such funds as a large part of most investors' allocations, there are places for these funds: just not sure about the two reviewed here. Knowing what to avoid is as important as other selection inputs!

So far, I give both ETFs a Hold rating after doing those comparisons. Risk reduction working; returns lagging competitors.

Links to related option-strategy funds:

• QQQX Vs. QYLD: 2 Covered Call Funds On The NASDAQ 100
• QQQX Vs. QYLD: 2 Covered Call Funds On The NASDAQ 100
• CCOR Vs. JEPI: Trading Income And Some Return For Much Less Risk
• ETY: Valuation Comes Down To A Better Level

For further details see: