- The S&P 500 Covered Call & Growth ETF name hints at the twist. The index used does too: CBOE S&P 500 Half BuyWrite Index.
- With the Index being critical to understanding how XYLG differs from its competitors, the Index is covered in detail and its performance versus the full BuyWrite Index is provided.
- The article compares XYLG against XYLD, which covers 100% of its AUM and DIVO, an enhanced-income ETF that uses Call options and invests in a subset of S&P 500 stocks.
- While history is short and no major pullback has occurred, for investors looking for 4% yield and willing to give up some appreciation, I would rate XYLG as Bullish.
- Looking for more investing ideas like this one? Get them exclusively at Hoya Capital Income Builder. Learn More »
(This article was co-produced with Hoya Capital Real Estate)
Seeking Alpha writers cover option-writing funds on a large scale, especially in these times where most Fixed Income assets might not even provide a real return after accounting for inflation, let alone taxes! Some use options, not for income, but for risk reduction. Depending on how that strategy is implemented determines the level of protection and potential gains that could be sacrificed in the process.
The S&P 500 Covered Call & Growth ETF (NYSEARCA:XYLG) employs an option strategy that compromises between income and equity price appreciation capture. The Global X S&P 500 Covered Call ETF (XYLD) uses the full option coverage against the same set of stocks. Though short, the next chart compares the two's recent results, plus SPY, representing a clean S&P 500 investment.
As expected when SPY is bullish, XYLG will capture more of the price appreciation than XYLD would. More on this later.
While history is short and no major pullback has occurred, for investors looking for 4% yield and willing to give up some appreciation, I would rate XYLG as Bullish.
With XYLG just celebrating its first anniversary, I turned reviewing both Indices to get a better idea of how the strategy difference affects investor results.
CBOE S&P 500 Half BuyWrite Index (used by XYLG)
CBOE provides this description on their index:
The Cboe S&P 500 Half BuyWrite Index (BXMH) is a benchmark index designed to track the performance of a hypothetical covered call strategy. The BXMH Index is similar in design to the Cboe S&P 500 BuyWrite Index (BXM). However, the difference in methodology is as follows: the strategy only writes half a unit of an ATM monthly SPX Call option while the long SPX Index position remains unchanged.
Source: cboe.com bxmh
I bolded the difference you will see between the indices. The BXMH is a total return index that is rebalanced monthly. Dividends paid on the component stocks underlying the S&P 500 Index and the dollar value of option premium deemed received from the sold call options are functionally “re-invested” in the covered S&P 500 Index portfolio. Under the BXMH Index methodology, roll date is the third Friday of each month. Should the third Friday fall on an exchange holiday, the roll date is the preceding day.
CBOE S&P 500 BuyWrite Index (used by XYLD)
CBOE provides this description on their index:
The Cboe S&P 500 BuyWrite IndexSM (BXM) is a benchmark index designed to track the performance of a hypothetical buy-write strategy on the S&P 500 Index®. The BXM is a passive total return index based on (1) buying an S&P 500 stock index portfolio, and (2) "writing" (or selling) the near-term S&P 500 Index (SPXSM) "covered" call option, generally on the third Friday of each month. The SPX call written will have about one month remaining to expiration, with an exercise price just above the prevailing index level (i.e., slightly out of the money). The SPX call is held until expiration and cash settled, at which time a new one-month, near-the-money call is written.
Source: cboe.com bxm
Under the BXM Index methodology, the roll date is the third Friday of each month. Should the third Friday fall on an exchange holiday, the roll date is the preceding day. BXM is a total return index that is rebalanced monthly. Dividends paid on the component stocks underlying the S&P 500 Index and the dollar value of option premium deemed received from the sold call options are functionally “re-invested” in the covered S&P 500 Index portfolio.
The next chart shows how much return investors "lost" if they invested in the BXM Index versus the BXMH Index.
Source: CBOE.com, data adjusted to 100 on 3/22/02; oldest BXM data; by Author
The XIRR comes to 7.77% for the BXMH Index and 5.71% for the BXM Index. Another interpretation is BXMH investors are 46% better off since early 2002. The outperformance is understandable as the SPDR S&P 500 Trust ETF (SPY) was up about 9.4% over the same time span. So while XYLG investors bet XYLD investors, they still trailed SPY investors by over 150bps, even with the higher yield!
Exploring the S&P 500 Covered Call & Growth ETF
Seeking Alpha describes the ETF as
XYLG is an exchange traded fund launched and managed by Global X Management Company LLC. It invests in public equity markets of the United States. It invests directly and through derivatives in stocks of companies operating across diversified sectors. It uses derivatives such as options to create its portfolio. The fund invests in growth and value stocks of companies across diversified market capitalization. The fund seeks to track the performance of the Cboe S&P 500 Half BuyWrite Index. XYLG launched on 9/18/20.
Source: seekingalpha.com XYLG
XYLG has amassed just $35m in assets. The income strategy shows as the yield is 4.3%. Global X charges 60bps in fees. Unlike XYLD, XYLG only writes At-The-Money Call options on half the value of the equities held by using options based on the S&P 500 Mini Index.
The manager lists three strategic reasons to own the ETF:
High Income Potential
XYLG seeks to generate income by writing covered calls on the underlying index.
By writing calls on 50% of the portfolio, the strategy allows investors to capture half the upside potential of the underlying index. Global X provides this PDF that explains Covered Call strategies.
XYLG expects to make distributions on a monthly basis.
The ETF holds all the stocks in the S&P 500 Index with the same allocations.
Source: etf.com XYLG
Using the same source shows this matches what SPY holds; the option strategy does not affect this part of the ETF strategy.
The latest Top 10 holdings are:
Source: globalxetfs.com Holdings
For followers of SPY or the S&P 500 Index, no surprises here. XYLG uses options based on the Mini-SPX Index, which equals 1/10th the value of the Standard & Poor's 500 Index (SPX). As of this writing, XYLG was short 384 contracts of the S&P 500 Mini contracts with a strike price of 470 and expiration date of 12/17/21. Value at this time is -$245,000. Before the 11/26/21 drop, the Mini S&P 500 Index was right on the strike price; 470.
Source: seekingalpha.com DVDs
Payouts will fluctuate with option premiums earned, which are affected by the market's perceived level of risk; commonly measured by the VIX Index.
COVID drove risk to record heights; the South African variant moved the Index off the recent low. XYLG has a policy on distributing the premiums earned. This is how Global X explains the process:
The monthly distribution of QYLD, XYLD & RYLD is capped at the lower of: a) half of premiums received, or b) 1% of net asset value (NAV). For QYLG & XYLG, the monthly distribution is capped at the lower of: a) half of premiums received, or b) 0.5% of net asset value ((NAV)). The excess amount of option premiums received, if applicable, is reinvested into the fund.
Source: globalxetfs.com Covered-Call-Rpt
This has been the result:
Source: globalxetfs.com Covered-Call-Rpt
Investors who own ETFs that write options know some of the distribution could be deemed Return-of-Capital. Each month, funds file a 19a notice with the SEC with the latest estimate of the current and YTD distributions. While the exact allocation is not known until the following 1st quarter, the reports provided useful information to investors. Since the fiscal year just rolled, I used the one from September.
Source: globalxetfs.com 19a-notice
So far in 2021, most of the distributions have been from capital gains, none from ROC, unlike for the first month's distribution, which was 88% ROC.
Seeking Alpha grades all US ETFs, based on several factors and across three time periods.
Source: seekingalpha.com/symbol Grades
XYLG Vs XYLD
Here we see how much better XYLG has done as the market has basically moved up during its short life. Owning XYLD has resulted in less volatility though. Taking the monthly returns along with SPY data, you get an interesting picture.
Source: portfoliovisualizer.com (compiled by Author)
In chronological order, the only pattern appears to be neither ETF was the better performer for a period longer than two months. When you sort the data in ascending order by SPY's return, XYLD clearly does better when SPY does poorly; with the opposite being true for XYLG. There is only one exception to that pattern.
Steven Fiorillo recently posted a review of XYLD, which I link here.
XYLG Vs DIVO
The Amplify CWP Enhanced Dividend Income ETF (DIVO) invests in dividend-paying stocks of the S&P 500 Index and then adds income by selling Call options as explained by Amplify:
DIVO is an actively managed ETF of high-quality large-cap companies with a history of dividend growth, along with a tactical covered call* strategy on individual stocks. DIVO is strategically designed to offer high levels of total return on a risk-adjusted basis.
Source: amplifyetfs.com DIVO
So while the universe will differ (DIVO only holds about 20 stocks), the 5% yield is near what XYLG investors get, thus DIVO could be considered an alternative ETF. Again, the short history of XYLG limits the value of the comparison.
Since its start about 14 months ago, XYLG has provided better price growth and Total Return than DIVO has. The deciding factor could be which sector allocation an investor prefers.
Source: etfdb.com Compare
I did a complete review of DIVO last summer, which I link here.
What one bad day shows
As I started writing this article, the Black Friday massacre, as some in the News referred to it, unfolded. This is how the four ETFs mentioned here performed that day. The market closed at 1pm, but SPY apparently traded after (and before) hours.
As expected, the Covered-Call ETFs did the best, though being that close was a bit of a surprise. DIVO coming in last revels the ETF's volatility differs from SPY as one might expect with the sector exposure differences. On the following Monday, XYLG almost matched SPY’s rally, where, as expected, XYLD lagged behind.
This article did not get into all the Buy/Write CEFs or the funds that use options to provide Bear market protection. There are also funds that use option strategies against other indices such as NASDAQ and Russell 2000. Here is a list of just the ones Global X offers, some even newer than XYLG.
Using the Hoya Capital Income Builder database, here are nine funds that use options in different ways, plus SPY, for investors just starting to explore this market segment.
Source: seekingalpha.com Hoya Capital
While history is short and no major pullback has occurred, for investors looking for 4% yield and willing to give up some appreciation, I would rate XYLG as Bullish. Investors might want to wait to see how much of any market drop is "covered" by the option writing income.
I ‘m proud to have asked to be one of the original Seeking Alpha Contributors to the 11/21 launch of the Hoya Capital Income Builder Market Place.
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This article was written by
Retired Investor has been investing since the 1980s and has a background in data analysis and pension fund management. He writes articles to help others prepare for retirement by investing in CEFs, ETFs, BDCs, and REITs. He is a long only investor and shares strategies for trading options with a focus on cash-secured-puts.He is a contributing author to the investing group Hoya Capital Income Builder. Hoya specializes in the portfolio management of publicly traded real estate securities and dividend ETFs. Learn more.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of SWAN 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.