This sounds nice and arguably even sensible, but upon empirical investigation, this argument doesnt hold much water either, at least over the past 15 years. In the interest of full disclosure, its also worth noting that these short backtests paint a somewhat unrealistically rosy picture for these covered call funds. //smoothscroll Create a Trading Plan easily with My Covered Calls and ProWriter free software. So some small allocation to a covered call fund may be warranted for the income investor or retiree. switchWidth: 810, VT vs. VTI Global Stock Market vs. Total U.S. Stock Market. J.P. Morgan Asset Management's website and/or mobile terms, privacy and security policies don't apply to the site or app you're about to visit. An exchange traded fund (ETF) is a marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund. Here is an example that is for illustrative purposes only: From a tax perspective, the covered call option premium (cash flow received from writing a call option) is considered a capital gain. Details of payment dates and frequencies are available on the funds website. Take the guess work out of the equation and never miss an opportunity by instantly seeing the highest returns (YIELD), available by using My Covered Calls. It is non-diversified. Consider 3 different scenarios: An ETF with a NAV of $10 and during the year generates $1 in option premium. Read my lengthier disclaimer here. Instantly scan ASX options to find the highest returns available. This means that you should aim to buy QYLD at least two business days before the record date (as ETF trades take two business days to settle) should you wish to receive a distribution. Global X rolls out Russell 2000 covered call ETF, Global X launches Nasdaq 100 covered call ETF in Europe, Global X adds two US equity ESG ETFs to covered call suite, Global X launches half-covered S&P 500 and Nasdaq 100 ETFs, Global X rolls out three income-enhanced US sector ETFs, Horizons Nasdaq 100 Covered Call ETF reaches $100m AUM milestone, Horizons changes index of S&P 500 covered call ETF, Global X launches income-enhanced US small-cap ETF, Global X adds Dow Jones ETF to covered call series, Credit Suisse issues covered call strategy ETN on iShares Silver ETF, Horizons debuts in US with S&P 500 covered call strategy ETF, Evolve unveils Enhanced Yield Canadian and US equity ETFs, Horizons launches Active S&P/TSX 60 Covered Call ETF, Stoxx expands Euro Stoxx 50 covered-call index series, Credit Suisse lists SPDR Gold Shares Covered Call ETN, Use of this website is subject to the terms of our, Two Distinct Opportunities in China Innovation and Technology - KraneShares, A new innovative approach to access Chinas technological rise - UBS Asset Management. 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This doesnt even consider potential tax costs. Because of this, it is common to schedule a special payment to the shareholders close to the end of the income year. Put another way, a covered call is a hedged strategy as the writer is in a position to deliver the stock if it is called. Planning and writing covered call options is easy with My Covered Calls. In the month of August, the VIX increased from 22.84 to 25.87. prependTo: "#page" Global X Management Company LLC disclaims responsibility for information, services or products found on the websites linked hereto. Any cookies that may not be particularly necessary for the website to function and is used specifically to collect user personal data via analytics, ads, other embedded contents are termed as non-necessary cookies. Subscribe to My Covered Calls, including the free trial or special offer; and get the following: . We'll assume you're ok with this, but you can opt-out if you wish. A covered call ETF is a fund that purchases a selection of stocks and writes call options on them to boost investors' yield. Selling covered calls can help investors target a selling price for the stock that is above the current price. I lead the Paid Search marketing efforts at Gild Group. Removing that high yield, the capital appreciation component of some of these funds has actually been negative since inception, as is the case for QYLD:QYLD without dividend reinvestment. Now lets cover the list of the best covered call ETFs. Proponents seem to erroneously believe that covered call ETFs are somehow made safe by their selling options. I definitely could not do what I am doing without it. But opting out of some of these cookies may affect your browsing experience. You can receive dividend income from your shares, and if you sell a share for more than the purchase price + transaction costs you make a profit this way as well. At-the-money options are those options with strike prices identical to the price of their underlying securities. The buyer of that call option is hoping QQQ goes up. The $4.2 billion Global X Nasdaq 100 Covered Call ETF ( QYLD) gets income from selling calls (which give owners the right to buy a particular stock for a set price during a set time frame) on . Conveniently, this backtest includes the major drawdowns of 2008, 2018, and 2022, giving us a pretty good stress test. Distributions are paid on the payment date, which is announced ahead of time on the ASXs website. Ticker: HDIV.TO. Lower costs. However, exchange-traded funds give investors of all stripes access to them with covered call ETFs. nested: true, Covering calls. Happy to talk about Covered Calls anytime. I wrote a comprehensive review of M1 and why its great for income investors here. With YMAX's total funds under management (FUM) figure over $100 million, the ETF meets our team's . Author's note: This article was released to CEF/ETF Income Laboratory members on December 9th. The strategy effectively eliminates all potential upside related to the performance of the ETFs equity holdings. VXUS vs. IXUS Vanguard or iShares International ETF? We retired during Aug 2017 and purchased shares with our SMSF. window._wpemojiSettings = {"baseUrl":"https:\/\/s.w.org\/images\/core\/emoji\/14.0.0\/72x72\/","ext":".png","svgUrl":"https:\/\/s.w.org\/images\/core\/emoji\/14.0.0\/svg\/","svgExt":".svg","source":{"concatemoji":"https:\/\/www.etfstrategy.com\/wp-includes\/js\/wp-emoji-release.min.js?ver=6.1.1"}}; else Let's have a closer look at one of the more popular Covered Call ETFs in Canada, ZWB, which has been around since 2011. The logic behind selling call options against assets investors already own is that it ensures investors are covered from a margin call perspective hence the term covered call. Lump Sum Investing (DCA vs. LSI), How To Invest Your HSA (Health Savings Account), Factor Investing and Factor ETFs The Ultimate Guide, Paul Merriman Ultimate Buy and Hold Portfolio. This $1 is paid over the course of the year . Small stocks also beat large stocks over this time period, which explains RYLDs outperformance of both XYLD and QYLD. Investors looking to adapt to the current macroeconomic environment should consider the benefits of options writing strategies - in particular, using ETFs that implement a covered call overlay. jQuery(document).ready(function() { JEPI has a distribution yield of 11.66% and a fee of 0.35%, making it the most affordable fund on this list. read. AYLD writes three-month call options, rolled quarterly, while UYLD and QYLD write one-month call options, rolled monthly. min: 400, 3. Clicking Confirm below will take you to a different website, intended for jurisdictions outside the US. Email address (will not be published) (required). Respectively, they track the S&P 500, the Nasdaq 100, and the Russell 2000. If the retiree is withdrawing regularly for current income, some allocation to a covered call ETF may arguably be good for retirement, but this of course depends on the investors personal goal(s), time horizon, risk tolerance, and other investments in the portfolio. If you are looking to target the gold sector and also value a very high-income stream, GLCC is an excellent ETF to consider for your portfolio. Covered-call ETFs generate income by selling call options on a portion of their shares. Roth IRA vs. Your gain is $10 $3 (cost of buying the option) = $7. Market Pulse. Explore research, content or product pages within our site, You Are Now Leaving the Australia Website of Global X ETFs. It takes me a few hours a month from home. Technology & Innovation in China: Thoughts and Perspectives - KraneShares et al. We adhere to a strict Privacy Policy governing the handling of your information. The ticker symbol is ZWB for the BMO Covered Call Canadian Banks ETF. Explore research, content or product pages within our site, You Are Now Leaving the Australia Website of Global X ETFs. Novice investors seem to have this idea that the income from these expensive buy-write funds are free money and that selling shares of a low-cost index fund like VTI to realize gains of an equal amount is somehow inferior to receiving a monthly distribution. Here are the risk and total return metrics for QYLD, XYLD, RYLD, DIVO, JEPI, KNG, the S&P 500, and a traditional 60/40 portfolio for the period June 2020 through 2022. Covered call funds are extremely popular investments in retirement circles, and . //listen for scroll For example, the Global X NASDAQ 100 Covered Call ETF (QYLD) buys all the stocks in the Nasdaq 100 index and sells one-month call options on the underlying index. Options are rolled the day before expiry. But what I find even more exciting is using this strategy on Stocks and Exchange Traded Funds (ETFs) on the US markets. Topics may span disruptive tech, income strategies, and emerging economies. Once again, thinking of yield as income separate from principal, while it may make you feel better, is just mental accounting with no magical benefits. Call options are usually sold to generate income in a flat or mild bear market. el.hide(); //in case the user forgot Persons in respect of whom such prohibitions apply should not access these websites. Effective on June 27, 2022, they've added another to their covered call suite: the Horizons . Past performance is not necessarily a guide to future performance. Selling covered calls is an investment strategy that can be used to generate additional income from the stock positions you already own. Stocks. Even then, as Ive noted elsewhere and as the backtests above show, there are more efficient, more effective ways to de-risk a portfolio, like bonds. A covered call is an options strategy whereby an investor holds a long position in an asset and sells or writes call options on that same asset in an attempt to generate more income (the additional income from the options premium) than the asset would otherwise provide on its own from dividends or other distributions. A covered call ETF is a fund that holds assets like stocks or bonds and writes call options on them, usually to generate income and a high distribution yield. None of these links imply Global Xs support, endorsement or recommendation of any other company, product or service. Get the latest Global X NASDAQ 100 Covered Call ETF (QYLD) real-time quote, historical performance, charts, and other financial information to help you make more informed trading and investment . JEPI - JPMorgan Equity Premium Income ETF. In fairness, novice investors likely see the extremely attractive, high distribution yields of these funds and dont look much further, and they probably dont understand how covered calls work. In doing so, DIVO leaves more upside potential but has a lower distribution yield than other funds on this list. AYLD aims to provide investors with a return that, before fees and expenses, tracks the performance of the S&P/ASX BuyWrite Index. QYLD is the most popular covered call ETF with nearly $7 billion in assets, which is more than half of the total assets under management of all covered call ETFs combined (about $12 billion). Their total return performance has been nearly identical historically. The premiums QYLD generates may partly cushion drawdowns. Introduction What Are Covered Call ETFs and How Do They Work? This is because covered call sellers receive two income streams: first the dividends, second the premiums from the calls they sell. (a.addEventListener("DOMContentLoaded",n,!1),e.addEventListener("load",n,!1)):(e.attachEvent("onload",n),a.attachEvent("onreadystatechange",function(){"complete"===a.readyState&&t.readyCallback()})),(e=t.source||{}).concatemoji?c(e.concatemoji):e.wpemoji&&e.twemoji&&(c(e.twemoji),c(e.wpemoji)))}(window,document,window._wpemojiSettings); Such links are provided as a convenience. [1] If at-the money options are unavailable, the fund will sell nearest out-of-the-money call options. Now lets remove JEPI and RYLD to go back a bit further to April 2018, which is when KNG launched:TickerCAGRSt. Example: By using leverage, an ETF where the underlying is platinum can gain 3x for each 1x increase in the price of platinum. Investors are encouraged to do their own research before choosing investment . Dividends from covered call ETFs may be classified and thus taxed as return of capital (ROC) or ordinary income, depending on the year. }); See their actual option returns now. DIVO aims to provide income from both dividends themselves and option premiums. Covered calls are an investment strategy where investors buy a stock, or group of stocks, and sell call options on them. Of course, this also means that the ETF risks losing 3x for each 1x decrease in the price of platinum. XYLD is next in popularity with a little over $2 billion in assets. }); shares) that you own, and issue a call option for them. By subscribing to email updates you can expect thoroughly researched perspectives and market commentary on the trends shaping global markets. From the fund's December 2012 inception through December 2021, growth-oriented stocks boomed. Global X S&P 500 Covered Call ETF (NYSEARCA:XYLD): XYLD is a fund that tracks the S&P 500 Index and writes one-month, at-the-money call options for up to 100% of the assets. However, writing call options provides a third source of income, derived from the premiums received from the selling of options. //Function to fade in/out the "Go to Top" Link for scrolling Lets assume that you purchase 100 shares in Apple. Generally speaking, the payment date falls two weeks after the record date. About Covered Calls. //jQuery.noConflict(); Global X NASDAQ 100 Covered Call ETF QYLD is a more sophisticated selection, which Davi says makes sense in a market where lofty stock valuations and volatility are expected . None of these links imply Global Xs support, endorsement or recommendation of any other company, product or service. In the example above, a call option was issued for 1 Apple share. ETF:s trades like common stock on stock exchanges and can be easily bought and sold. We and our partners use data for Personalised ads and content, ad and content measurement, audience insights and product development. Any advice provided by Global X Management (AUS) Limited (Global X) is general advice and does not take into account your personal objectives, financial situation or needs. (2023). var el = jQuery(this); I have first-hand experience with every product or service I recommend, and I recommend them because I genuinely believe they are useful, not because of the commission I get if you decide to purchase through my links. RYLD comes with an expense ratio of 0.60% and lists on Cboe Global Markets, parent company of ETF.com. There is a potential for favorable taxation on cash flows, since capital gains from sales inside the fund arent passed through shareholders. return this.each(function() { Fortunately, tax straddle rules do not apply to "qualified covered calls." A qualified covered call is a covered call with more than 30 days to expiration at the time it is written and a strike price that is not "deep in the money." The definition of "deep in the money" varies by the stock price and by the time to expiration of the sold call. Remember what I said earlier. Furthermore, call option premiums provide a hedge against falling dividends, as call options premiums are usually larger for companies with little to no dividends. The main competitors of Global X Nasdaq 100 ESG Covered Call ETF include ProShares Short Euro (EUFX), MicroSectors FANG+ Index -2X Inverse Leveraged ETN (FNGZ), ProShares UltraShort Australian Dollar (CROC), Invesco International Ultra Dividend Revenue ETF (RIDV), Direxion Daily Small Cap Bull 2X Shares (SMLL), Defiance Next Gen Food . The Digital Economy: Investment Perspectives and Projections - First Trust et al. The Global X Nasdaq 100 Covered Call ETF (QYLD) follows a "covered call" or "buy-write" strategy, in which the fund buys the stocks in the Nasdaq 100 Index and "writes" or "sells" corresponding call options on the same index to generate income over and above dividends. Investments may go up or down in value and you may lose some or all of the amount invested. With the markets weighed down heavily with volatility, it's a challenge for fixed income investors to get . This was a big wake-up call for many QYLD investors in early 2022, when Global X announced that 100% of QYLDs distributions for 2021 would be classified as and thus taxed as ordinary income, not as ROC. Instead, the fund retains the money and invests it, with the hope of creating a class of income that can be distributed to shareholder without triggering tax liability for the recipients. 25 holdings makes me nervous, regardless of what these numbers say. I am not a financial advisor, portfolio manager, or accountant.