XYLD - XYLD: A Bad Idea As The S&P 500 Continues To Climb

2024-07-09 04:15:19 ET

Summary

• The recent performance of the Global X S&P 500 Covered Call ETF reinforces our long-held view that covered call option strategies on the S&P 500 are a bad idea.
• Although some investors may be willing to cap returns in exchange for a steady source of income, periodically selling a portion of equities effectively achieves the same outcome.
• In a bullish equity market, XYLD severely underperforms while leaving investors exposed to most of the downside risk.
• We demonstrate that not only do sharp losses in a bear market risk wiping out cumulative returns from XYLD over several years, but the recovery to breakeven may potentially take longer.
• Judging from the behaviour of previous bull markets, we argue that the higher the equity market climbs, the riskier covered call strategies become.

The recent performance of the Global X S&P 500 Covered Call ETF ( XYLD ) reinforces our long-held view that a covered call option strategy on the underlying S&P 500 Index ( SP500 ) is a bad idea. While the potential of earning attractive option premiums even in flat markets may seem like a great idea at first, covered call strategies ultimately do not provide any meaningful advantage for investors. The only exception being that one happens to be a market wizard capable of precisely timing flat markets....

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