A recurring theme here is the extent to which new products will evolve to improve the result that investors get. I think we're seeing that in real time from Global X and its covered call funds. First there was QYLD which sells monthly covered calls and while the distributions are high there has been no price-only growth since the fund's inception. Then came XYLG which sells monthly calls on half the portfolio and since its inception, it has yielded about 11% and had price only compounding at 2.43%.
A couple of months ago, Global X came out with EDGX which sells weekly covered calls targeting a 9% annual distribution which should allow for better upcapture which they believe their clients want. The chart encapsulates the "improvement" even if it is too soon to draw any conclusions about EDGX.
XYLD is the oldest fund in this product line from Global X and since its inception the S&P 500 has compounded at 14%. A 9% yield from EDGX with 5% of price appreciation left over would be a great outcome. Global X believes it can be more tactical with EDGX to get more upside than the more methodical methods for XYLD and XYLG. Once you accept that these are not going to capture the S&P 500 on the way up, you can start to assess whether there is any utility.
There is more yield than something like TLT but with less volatility than TLT. If you want to compare to high yield bonds instead of long dated treasuries, a fund like HYG is less volatile than the covered call funds.
Getting 5% after a large yield is paid out would be compelling however building some sort of model or whatever that relies on 14% from the S&P 500 might not pan out going forward. That's a very high number and while we can hope that persists, putting some large weighting into EDGX expecting a 9% payout plus 5% in price only growth might turn out to be realistic. We've talked about small slices to completely different types of high yielding niches such that 15-20% of a portfolio split between three or four disparate strategies, disparate risks, can work. The Global X funds don't yield 50%, they might end up being lousy holds but they aren't going to go to zero.
In a similar vein, I've been following BTYB which allocates 80% to five year treasuries and 20% to a synthetic Bitcoin covered call. The outcome sought is a yield that is twice the yield of the five year treasury. I tried to model it using YBTC which I believe is the first Bitcoin covered call ETF. When I do that, it only takes 10% in YBTC to get an 8% yield as follows.
This backtest goes back to January 2024 so we can see how the combo did as Bitcoin dropped a lot last fall.
Is a drop of just over 7% (price only) too much? It's still down that much for anyone taking the distributions out of their account. Is it too much? That is a question that anyone actually considering this fund needs to consider. However, my backtest only has 10% in Bitcoin, BTYB has 20%. Putting 10% into YBTC got us 2x the yield of UFIV but if we tweak it to 80% UFIV/20% YBTC, the blend fell by 15% on a price only basis and has not recovered yet.
The drop in Bitcoin was pretty big but far from an outlier.
I am obviously intrigued by selling volatility but it is not something I do a lot of, it is tricky and you have to look hard to find a compelling risk return tradeoff.
A small slice for someone looking to add yield but able to overlook line item risk can work but keep it small, repeated for emphasis.
The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.
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