Trying To Figure Out Covered Call Funds

Jason Zweig wrote a column about ETFs that sell covered calls. He wasn't negative on them or necessarily positive, his message was more about understanding what they can and cannot do for a diversified portfolio. The fund that got the most attention was the Global X S&P 500 Covered Call ETF (XYLD). The fund pays out monthly and for the last two and half years the payouts have been enormous which will skew most charts. Looking at something like Yahoo Finance shows XYLD down about 22% last year but you need to add back in 12% of distributions to get a more accurate picture which Portfoliovisualizer does. 

 

I blanked out the name of the third fund, it is a covered call fund that I own. What they don't do is they don't look like the stock market despite correlation numbers that say otherwise. ETFreplay shows correlations between XYLD and SPY running above 0.75 that vast majority of the time. 

Are covered call funds proxies for bonds?

 

In a word...not so much. How about a way to blend XYLD with SPY to get a 60/40-like result?

 

The CAGR is kind of close but the standard deviation isn't. Surprisingly, the worst year for the 40/60 is noticeably better than VBAIX. I had to play around with different percentages and this is the closest I got. It makes sense that the covered call funds are fairly reliable, not infallible, lower beta equity. Is there a role for that attribute in your portfolio? Do you already have something that meets that objective? Anyone favorably disposed to this strategy could probably play around with other factor exposures to maybe come up with a blend that captures more MCW upside than the covered call funds do by themselves with less volatility. If you spend the time on this, please share what you find here. 

I wanted check in again on leveraged and inverse single stock ETFs. We'll use the Tesla complex as our example. Here's YTD.

 

TSLA is the underlying common TSLQ is 1.25x leveraged, TSLL is 1.5x leveraged and TSLQ is 1x inverse. The leveraged long funds are a little closer to tracking their daily objective over a longer period. The inverse is off by kind of a lot. Let's go a little longer out and see where it lands. 

 

This is about as far back as we can compare all four. TSLL is obscured but for the period charted it is down 48%. So longer term the leveraged long funds are down more than what their daily objective says and the inverse is again not up as much as someone might hope. 

Usually when I do this exercise, the funds are much closer to their daily objective over longer periods. The purpose of this study is to better understand the potential capital efficiency from these types of funds. Index funds might be better suited than the individual stocks but it is early in this game. It might never pan out. Part of managing portfolios should include understanding things you might be very unlikely to ever use. It can help with the things you do use or might add in down the road. 

I have no interest or intention of using TSLA or any of the funds mentioned personally or for clients.