The Global X S&P 500 Covered Call ETF (NYSEARCA:XYLD) was created on 6/21/13, and since its inception, it's paid 101 consecutive distributions. Some investors dislike XYLD due to its mechanics of writing covered calls to generate option premium, which is then paid out as distributions. I personally like the investment approach that XYLD takes because I utilize a similar strategy by writing covered calls on boring dividend stocks I own to increase the income these investments generate. I wrote my first article on XYLD on 7/9/21, and since then, its price has appreciated by 0.73%. This is exactly what I want to see from a fund like XYLD, as trading sideways is all I want it to do. When I make investments for income-producing purposes, I am just looking for a vehicle that will trade sideways and generate consistent income. If you're looking for growth, XYLD isn't an ETF that will meet your investment needs. If you're looking for a continuous stream of income that's generated monthly, XYLD is an interesting fund to consider.
In 2021 XYLD has generated $3.96 per share in income which has been paid in monthly distributions to its investors. For the first 11 months of 2021, XYLD has averaged a monthly distribution of $0.3597 per share. XYLD is currently trading at $49.38 and has paid $3.96 in income, an 8.01% yield prior to the December distribution. If XYLD's price stays the same and its December distribution is the 11-month average of $0.36, XYLD will finish the year having paid investors $4.32 per share in distributions. This would put XYLD's yield at 8.7% in 2021, which is well above the average yield found in the S&P 500 index and many dividend ETFs. XYLD is strictly an income play, and I will illustrate just how much income has been generated since its inception.
Since XYLD's inception in June of 2013, it has never missed a distribution. In 2013 XYLD paid its investors $1.10 per share as it paid 6 distributions. There are 7 full years of data from 2014 thru 2020, and XYLD has averaged $2.55 in annual distributions. In 2021, 11 months have passed, and XYLD has paid $3.96 to its investors. One of the reasons people dislike XYLD is because the distributions aren't predictable or consistent. In 2016 XYLD paid $1.47 in distributions which is significantly lower than its average over the 7 full years we have data from. Over the long term, XYLD has accomplished its investment goal of writing covered calls and paying oversized distributions to its shareholders.
Many have asked in the comment section of my articles when I have written about the Global X Covered call strategies how they will perform in a down market. We haven't seen a true bear market since before XYLD was created. If you looked at the first half of 2020, when we experienced the country shutdown, XYLD paid a distribution of $0.26 in January, $0.26 in February, $0.18 in March, $0.21 in April, and $0.39 in June per share. The country shut down, and XYLD's strategy still generates a significant monthly distribution. Based on our data, I am bullish on XYLD through periods of turbulence as its track record speaks for itself.
(Source: Steven Fiorillo) (Data Source: Global X)
According to Seeking Alpha, going back to June 2013, it looks like XYLD closed at $40.45 on its first day. If you had invested $4,045 and purchased 100 shares in 2013, your original investment would have increased by 22.27% over the past 8 years. You also would have generated $2,291 in income from its distributions. This isn't taking into account the powers of compounding if you would have reinvested each of the 101 distributions.
There are some people that will say you could have just parked your cash in an S&P index fund and generated a larger return, and they would be correct. Investing in an index fund such as the SPDR S&P 500 Trust (SPY) would have generated roughly a 185% return since June of 2013. Income investing has a much different goal than looking for capital appreciation. From an income generation standpoint, XYLD has been a great investment as someone could have purchased 100 shares for $4,045 and seen their capital appreciate by 22.27% while getting $2,291 through monthly distributions over the years. This works out to roughly $22.68 per month for every 100 shares you own.
(Source: Seeking Alpha)
XYLD invests at least 80% of its total assets in the securities of the S&P 500 and writes call options on the S&P 500 index. Each time the fund writes a covered call option, the fund receives a payment from the investor who buys the option from the fund. The premium paid by the buyer of the option provides income in addition to the security's dividends or other distributions. XYLD uses an at-the-money call option strategy, and the options are written systematically on the monthly writing option date of the S&P 500. For all of this work, XYLD only charges 0.60% in management fees. This is an efficient way for investors to gain exposure to income generated from the options market without worrying about doing something incorrectly or spending time learning what to do. XLYD does all of the work as it writes call options on the S&P 500 index saving investors time and the broker fees of doing this independently.
Today XYLD has $761.45 million in net assets spread across 508 holdings. Global X is charging you an expense ratio of 0.6% for managing the fund, writing the covered calls, and paying you the distributions. Its current distribution yield is 8.83%, and over the past twelve months, its yield is 9.4%. Within XYLD's portfolio, you will find the largest companies in the U.S, including Apple (AAPL), Microsoft (MSFT), Amazon (AMZN), Tesla (TSLA), and Alphabet (GOOG, GOOGL). Finding a fund that invests in the largest companies in America then writing covered calls against the S&P index is a unique investment vehicle. This is an interesting option for income investors as it pays more than bond funds while generating some appreciation from top-tier companies.
(Source: Global X)
Through the first 11 months of 2019, XYLD generated $2.66 in income per share. In 2020 this increased by $0.62 (23.13%) YoY. In 2021 XYLD has grown the amount of income it has produced in the first 11 months by an additional $0.68 (20.74%) compared to 2020. Considering the monthly numbers, 2021 has been much more stable than 2020, paying between $0.33 and $0.42 per month per share. The mechanics of XYLD are working as each quarter, the Global X team writes options contracts against the underlying index and delivers large amounts of income to its investors.
(Source: Steven Fiorillo) (Data Source: Global X)
Overall, I like what I am seeing from XYLD compared to recent years. Its overall distribution has increased by 20.74% YoY, and it looks like XYLD will generate at least $4.32 in annual distributions for 2021, which would be an 8.7% yield based on today's share price. Looking at the chart below from Global X, it's hard to disapprove of XYLD as a lucrative income generation fund. The best part of the fund to me is that XYLD isn't dependent on dividend harvesting. If a company cuts or reduces its dividend payout, XYLD isn't affected. There will always be an options market, and XYLD has proven over the past 8 years that it can generate large amounts of income from writing covered calls against the index. I think 2021 is stacking up to be a great year for XYLD, and we will have to wait and see if the trend continues with increased distributions for 2022.
(Source: Global X)
XYLD is one of my income-producing investments, and it's working well for me. My investment approach has allocations for growth companies, value companies, dividends/income-producing investments, and indexing. I look at this as a Barbell approach because I utilize several aspects of investing to create my overall investment mix. For the income side of my portfolio, it's hard to find things I dislike with XYLD. Regardless of the external economic factors, XYLD has delivered 101 consecutive distributions. If you look at a block of 100 shares, XYLD has appreciated by over 20% while throwing off over $2,200 in income since its inception in 2013. For income investors, XYLD is worth looking at as there aren't many funds that generate this level of income.
I will be launching a subscription service called Barbell Capital on the Seeking Alpha Marketplace. Barbell Capital will provide exclusive research, model portfolios, investment tools, Q&A sessions, watchlists, and additional features for its members. I will also have a live portfolio dedicated to generating capital from trading, selling puts and selling covered calls. The profits will be allocated to future capital appreciating investments and investing in dividend investments to generate income while we sleep.
This article was written by
I am focused on growth and dividend income. My personal strategy revolves around setting myself up for an easy retirement by creating a portfolio which focuses on compounding dividend income and growth. Dividends are an intricate part of my strategy as I have structured my portfolio to have monthly dividend income which grows through dividend reinvestment and yearly increases. Feel free to reach out to me on Seeking Alpha or https://dividendincomestreams.substack.com/
Disclosure: I/we have a beneficial long position in the shares of XYLD, AAPL, AMZN, GOOGL either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Disclaimer: I am not an investment advisor or professional. This article is my own personal opinion and is not meant to be a recommendation of the purchase or sale of stock. Investors should conduct their own research before investing to see if the companies discussed in this article fit into their portfolio parameters.