XYLD - XYLD Yields 11.14% While Outperforming RYLD And QYLD Since 2021

2023-03-21 09:00:00 ET

Summary

• Since its inception in June of 2013, shares of XYLD are basically flat while generating 71.36% of its initial share price in dividends.
• Since 2021, XYLD has outperformed QYLD and RYLD by generating a larger total ROI and having a larger forward yield based on the TTM distributions.
• XYLD utilizes a buy-write covered-call strategy to generate income after investing in all of the companies within the S&P 500.

As the Fed continues to raise rates, the stock market has fewer appealing options to generate income. A traditional savings and checking account from SoFi Technologies ( SOFI ) will generate 4% and 1.2% APY if you are a direct deposit customer with them. You can get a 4.5% APY 1-year CD from Marcus by Goldman Sachs ( GS ) with as little as $500 deposited or buy 2-year T-bills yielding 3.846%. Taking on equity risk to generate 3% dividend yields isn't nearly as attractive as in 2021. If you're looking to put capital to work with the purpose of generating income, investors are not limited in their investment vehicles. Being able to generate 4% from a savings account or 4.5% from a CD risk-free changes the narrative around income investing. I believe this is why covered call strategy investment products continue to gain popularity. Global X pioneered the space and has some of the most popular covered call ETFs with billions upon billions in assets under management ((AUM)). The Global X S&P 500 Covered Call ETF ( XYLD ) was their first covered call product, going public on 6/21/13 at roughly $40 per share. Their other popular covered call products are the Russell 2000 Covered Call ETF ( RYLD ), and the Nasdaq 100 Covered Call ETF ( QYLD ). While QYLD has the largest amount of net assets totaling $6.94 billion, XYLD has outperformed both QYLD and RYLD since 2021. I am invested in all 3 funds, my largest position is in QYLD, and based on my research, XYLD has generated the largest amount of ROI and has the largest future yield on an investment of 100 shares since 2021.

The Global X S&P 500 Covered Call ETF ( XYLD ) in a nutshell

Some still feel that covered-call ETFs are a gimmick or that the covered-call strategy adds additional risk to the investment. All investments contain an element of risk, and proper due diligence should be taken prior to allocating capital toward any investment type, but these narratives are just false. Utilizing a covered-call strategy doesn't increase the risk to the downside, as your capping future upside potential.

XYLD utilizes a buy-write strategy and invests in all of the companies within the S&P 500, just like a traditional index fund on the buy side. XYLD then implements a sell-side where it writes or sells corresponding call options on the S&P 500. The options are written at the money on a monthly basis, and the premiums collected are used to fund its monthly distributions to shareholders. Covered Calls are written on 100% of the portfolio, which is how XYLD is able to pay a monthly dividend that currently has a double-digit yield base on the trailing twelve months ((TTM)).

XYLD holds 506 individual positions and is writing covered calls against its portfolio. The most recent call options have a 4,060 strike price, expiring on 3/17/23, so they expired worthless. Now they will rinse and repeat to generate income for the next month for their shareholders. All XYLD is doing is selling the right to purchase their shares at a future date at a specified price and collecting income through the option premium upfront. The only additional risk outside of the equities falling in value is that the upside is capped due to the covered calls, but you are getting paid upfront for the upside to be capped. This isn't a gimmick, and many investors, such as myself, write covered calls on individual positions to generate additional income within their portfolios. This is why I am a fan of covered-call ETFs for income purposes because it's taking a strategy that I use and deploying it on the indexes without having to do the work myself.

Based on my research XYLD has outperformed RYLD and QYLD since 2021 and has been an income machine since its inception

XYLD has been public for 9 years and 8 months. Since inception, its shares have been as high as $52.48 on 2/10/20 and as low as $35.21 on 3/16/20. If you had purchased shares at its inception at $40, your initial investment would be down -$0.07, which is a fraction of a percent as shares currently trade at $39.93. Remember, XYLD isn't an ETF focused on capital appreciation, its objective is to generate income from writing covered calls. Since its inception, XYLD has generated $28.54 in dividend income without missing a monthly distribution. If you had held XYLD since the beginning, your investment is flat, but you generated 71.36% of your initial investment through dividends, and you still have an asset base producing annual yields that exceed 10%. This is why XYLD is so appealing to income investors.

Some of the comments I receive discuss how using an investment since inception isn't realistic, as some investors don't hold positions for a decade. This is why I have done the numbers on purchasing 100 shares of XYLD, RYLD, and QYLD on 1/4/21. These models assume taking the income as cash and not reinvesting the dividends.

An initial investment of 100 shares in XYLD on 1/4/21 would have cost $4,616. Since then, the initial investment declined -$623, which is a negative ROI of -13.50% on the initial investment. XYLD has paid $1,069.06 in dividend income which is a 23.16% yield on investment. When the capital appreciation loss and dividends received are netted against each other, the total ROI is 9.66%. XYLD has paid $5.14 per share in dividends in the TTM, placing its future yield on the asset base at $514.28 or 11.14%.

An initial investment of 100 shares in RYLD on 1/4/21 would have cost $2,237. Since then, the initial investment declined -$474, which is a negative ROI of -21.19% on the initial investment. RYLD has paid $594.35 in dividend income which is a 26.57% yield on investment. When the capital appreciation loss and dividends received are netted against each other, the total ROI is 5.38%. RYLD has paid $2.47 per share in dividends in the TTM, placing its future yield on the asset base at $247.44 or 11.06%.

An initial investment of 100 shares in QYLD on 1/4/21 would have cost $2,269. Since then, the initial investment declined -$590, which is a negative ROI of -26% on the initial investment. QYLD has paid $537.56 in dividend income which is a 23.69% yield on investment. When the capital appreciation loss and dividends received are netted against each other, the total ROI is -2.31%. QYLD has paid $2.12 per share in dividends in the TTM, placing its future yield on the asset base at $212 or 9.34%.

Conclusion

XYLD checks off the boxes for me as an income investment. Since inception, the investment has been flat, and it's generated 71.36% of its initial share price through dividends. After comparing XYLD to RYLD and QYLD since 2021, XYLD has been the better investment as it had the least capital depreciation prior to dividends, generated the most total ROI at 9.66%, and has the largest future yield based on the TTM distributions. Covered-call ETFs aren't for everyone, but if you're looking for income, XYLD is an ETF that should be investigated. XYLD has an established track record and hasn't missed a payment in almost a decade of being public.

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