XYLD - XYLD: 11% Yield Monthly Payer Vs. S&P Alternatives

2023-05-12 09:15:00 ET

Summary

• XYLD yields ~11% and pays a variable monthly distribution.
• The XYLD ETF uses Covered Calls on the S&P 500 to generate monthly income and offers some downside protection to investors.
• We compare XYLD's performance, yield, and valuation to other S&P-based covered call funds.

The S&P 500 Index (SP500) has gained over 7% so far in 2023, but do you think that positive trend will continue?

Many economists and market watchers are calling for a recession, as the Fed continues to raise rates. If you want to hedge your bet, via getting some high yield income from the S&P, the Global X S&P 500® Covered Call ETF (XYLD) is one way to try to do that.

Fund Profile:

XYLD seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the Cboe S&P 500 BuyWrite Index. It follows a "covered call" or "buy-write" strategy, in which the Fund buys the stocks in the S&P 500 Index and "writes" or "sells" corresponding call options on the same index. The fund has a 0.60% expense ratio.

XYLD's monthly distribution is capped at the lower of: a) half the call premiums received, and b) 1% of the net asset value NAV. The excess of options premiums received, if applicable, is reinvested into the fund. (XYLD site)

The process is to buy all of the S&P 500 stocks, then sell 1-month options on the S&P 500 index; then distribute a portion of this option income. This process is repeated monthly.

Dividends:

XYLD and a very popular competing ETF, the JPMorgan Equity Premium Income ETF ( JEPI ), have similar trailing yields, both above 12%.

However, looking forward, XYLD has a much higher forward dividend yield, based upon its most recent monthly payout of $.376, of 11.11%; vs. 9.34% for JEPI. Neither XYLD's or JEPI's management have declared their next distribution yet, so this situation could change when they do declare.

Alternative Funds:

There are several other exchange-traded funds ("ETFs") and closed-end funds ("CEFs") which also employ a covered call strategy on the S&P 500, in order to generate income. Among them are 4 closed end funds:

-Eaton Vance Tax-Managed Buy-Write Income Fund ( ETB )

-Nuveen S&P 500 Buy-Write Income Fund ( BXMX )

-Nuveen S&P 500 Dynamic Overwrite Fund ( SPXX )

-BlackRock Enhanced Capital&Income Fund ( CII ).

JEPI is by far the largest fund in this group, with over $23B in assets, and the highest average daily volume, of 4.5M shares. It has an expense ratio of .35%, the lowest in the group, with 132 holdings. JEPI is the newest fund in this group, with a 5/20/20 inception date.

XYLD is the 2nd largest fund in this group, at ~$2.3B - it pays monthly, has 504 holdings, a low 0.60% expense ratio, and daily average volume of 604K shares. Its inception date was 6/21/2013. It has a .55 Beat vs. the S&P.

The BXMX CEF is the 3rd largest fund, with $1.39B in assets, 287 holdings, and 143K in daily average volume.

CII holds $817M in assets, with just 55 holdings, and 76K in average volume, followed by ETB, with $402M in assets, and 71K in average volume, 172 holdings, and a 1.12% expense ratio.

SPXX is the smallest fund in the group, with $282M in assets, a .89% expense ratio, 513 holdings, and 40K in average volume.

BXMX and SPXX pay quarterly, while the other 4 funds pay monthly:

Holdings:

XYLD's top sector is Tech, at 29%, followed by Health Care, at 14.22%, Consumer Discretionary, at 10.57%, and Financials, at 10.21%.

Comparing those weightings to the SPY S&P 500 ETF shows XYLD to be ~3% lower in Tech, 2.7% lower in Financials, and roughly in line on the other sectors.

As of 3/31/23, XYLD's top 10 holdings account for ~29% of its portfolio, up from ~25% at 12/31/22, and are topped by Apple Inc. (AAPL), at 7.5%, and Microsoft Corporation (MSFT), at 6.6%, with both positions ~1%-plus higher than last quarter:

Performance:

Thus far in 2023, BXMX, CII, and XYLD have all gained over 3%, but still lag the S&P, which is up ~7.8%.

JEPI, CII, and BXMX have all delivered higher ~total returns than the S&P over the past year, ranging from 6.7% to 7.55%, whereas XYLD's ~total 1 Year Return is 2.09%.

ETB is the worst of the lot for performance, down -1.83% so far in 2023, with a -7% total return over the past year.

Looking back further, XYLD has a 3-year NAV performance of 12.11%, a 5-year NAV performance of 5.29%, and a 7% performance since inception, a bit lower than its index's performances. Its 3-year market price performance of 13.14% indicates that it has gotten a ~1% premium over its 12.11% NAV performance in that period.

The 10-year total returns chart shows XYLD on top by a wide margin, followed by a group of 3 funds - CII, BXMX, and SPXX, with ETB in the bottom:

Valuations:

Unlike CEFs, ETFs prices tend to closely track their NAVs. Since CEFs can sell at wide discounts or premiums over the years, it can be a useful strategy to compare their current Price/NAV vs. their historical averages, due to mean reversion.

ETB, the worst performer in the group, has the deepest discount, at -6.07%, vs. its 1-, 3-, and 5-year premiums of 6%, 4%, and ~5% respectively.

SPXX's Price/NAV of -2.93% is deeper than its 3- and 5-year prices of -1.62% and -0.74%.

Parting Thoughts:

If you think the S&P 500 is headed for a pullback, XYLD can provide some downside protection, as can some of these other funds, such as JEPI, CII, and BXMX. We don't have longer term results for JEPI, since it began trading only in 2020. Although JEPI trails XYLD in 2023, being roughly flat, this fund has seen a large influx of investor $ so far in 2023.

If you're interested in other high yield vehicles, we cover them every Friday and Sunday in our articles.

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