- RYLD has established a proven track record of paying large monthly distributions since its inception in April of 2019.
- RYLD's distribution is still one of the only investments that's outpacing inflation from an income generation perspective.
- RYLD has mitigated the market decline better than the respective indexes while throwing off large amounts of distributable income.
- I break down what an initial 100 share investment would look like since inception if you were to take the distributions as income or reinvest them along the way.
- I do much more than just articles at Barbell Capital: Members get access to model portfolios, regular updates, a chat room, and more. Learn More »
The Global X Covered Call funds have been controversial, to say the least. Some disagree with the methodology; some can't wrap their brains around capping your upside potential and sacrificing future growth for immediate income, while others are still under the belief that all options are too risky. I crunched the numbers and want to explain exactly what the Global X Russell 2000 Covered Call ETF (NYSEARCA:RYLD) has done since its inception in April of 2019. I will show the math if you take the distributions monthly or if you're reinvesting them as I am. The one thing to be clear about is that these covered call products will never outperform an index fund in a bull market because the upside is in fact capped. If you're not focused on an income-producing fund, then RYLD and its siblings that track the S&P and Nasdaq probably aren't the correct investments.
If you're an income investor looking for solid yield and reliable distributions, RYLD should be at the top of your list. RYLD sells covered calls at the money each month to generate income to fund its distributions. The beautiful thing is that RYLD isn't dividend harvesting and isn't impacted by companies reducing or slashing its dividend. Selling covered calls in the options market allows RYLD to harvest income without question each month. The markets have performed horribly, and RYLD is still throwing off large distributions to its investors. Today shares trade at $22.12 and have an annual distribution of $2.98, a forward yield of 13.48%. If you think this is too good to be true, it's not. RYLD has established a track record of reliability, and I am going to show you exactly what you can expect from investing in RYLD.
How has RYLD performed during the market downturn?
Before reviewing the math behind RYLD's distribution, I wanted to highlight how RYLD performed during the market crash. RYLD tracks the Russell 2000 index and its counterparts, the Global X NASDAQ 100 Covered Call ETF (QYLD), and the Global X S&P 500 Covered Call ETF (XYLD) track the Nasdaq 100 and the S&P 500. I plugged RYLD, XYLD, QYLD, the Vanguard Russell 2000 ETF (VTWO), Vanguard S&P 500 ETF (VOO), and the Invesco QQQ ETF (QQQ) into a chart to show exactly how each fund has reacted during the downturn.
As you can see, YTD RYLD has performed significantly better than its respective index fund VTWO, in addition to mitigating the downside better than VOO and QQQ. Many investors are under the impression that covered call funds deprecate quicker than index funds during downturns, which isn't the case. In fact, each of the covered call funds from Global X has outperformed their respective index during the downturn.
The math behind an investment in RYLD
There are mainly two reasons why someone would invest in RYLD. First to generate large amounts of income and second to reinvest the distributions to build a larger stream of income in the future. I will now break down the math behind both concepts and illustrate why RYLD achieves both concepts in spades.
The more common idea is to generate income, so I will start here. RYLD's inception was in April of 2019 at $25 per share. Hypothetically for this experiment, we will assume that an investor purchased 100 shares at $25 per share for an initial investment of $25 when RYLD started trading on the open market.
I went through Global X's site and correlated each of the distributions to their payable dates since the first distribution was paid in May of 2019. If you had held your shares since 4/17/19, your initial investment would have declined by $288 (-11.52%), as your 100 shares would be worth $2,212 instead of $2,500. Nobody likes to lose money, but that's just the surface of the investment. Since May of 2019, 36 distributions have been paid, amounting to $801.49 in distributable income which has been paid monthly. RYLD has generated 32.06% in income on the initial $2,500 invested. We have 2 full calendar years of data, 2020 and 2021, and in both years, RYLD beat today's current inflation rate. In 2020 RYLD produced $243.08 in distributions which is a 9.72% yield on the original $2,500, and in 2021 RYLD generated $301.43 in distributions, a 12.06% yield on the original $2,500. When you account for the distributions, the $288 in lost valuation becomes null and void, and there is still $513.49 (20.54%) left in distributable income, which RYLD has produced.
What about if you reinvest the distributions to build a larger income stream in the future? Here is what the table would look like.
By reinvesting each distribution, your share base would have grown to 141.04, providing an additional 41.04 shares. This would have increased your overall distributions to $953.34, adding an additional $151.85 in collected distributable income. Your overall investment would have grown by $619.82 as your current shares would be worth $3,119.82, which is a 24.79% increase on the original $2,500. While RYLD currently has a 13.48% yield based on its $2.98 distribution, you actually only invested $2,500 and let the distributions paid compound. Based on your 141.04 share count, you are producing $420.30 in annual distributions, which is a 16.81% yield on your original investment. In roughly 3 years, your share count has increased by 41.04%, your overall investment has increased, and your income generation power has increased.
RYLD has proven that it can provide large amounts of income during the best and worst of times. If you're looking for an investment vehicle to generate income today or build a future income stream, RYLD should be on your watchlist or in your portfolio. 2022 hasn't been pretty for many investors, but RYLD has declined less than the major indices and generated large amounts of distributable income in the process. The proof is in the numbers and the mechanics behind RYLD work. It will continue to be a mystery to me as to why so many investors are against the Global X Covered Call ETFs as they certainly accomplish their primary tasks.
I have RYLD, QYLD, and XYLD in my portfolio, I am adding to these positions while reinvesting every distribution. I believe these will be critical components to producing income in my retirement years and look forward to seeing the income stream grow along the way. When you look at what RYLD has done over a 3-year period by reinvesting the distributions, imagine the income stream it will produce in 15 or 20 years from now without adding an additional dollar of capital?
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This article was written by
Analyst’s Disclosure: I/we have a beneficial long position in the shares of RYLD, QYLD, XYLD, VOO 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.
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.
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