Exchange Traded Funds (ETFs)

Seeking Solace in a Covered-Call ETF

As global uncertainty continues to thrive during the COVID-19 pandemic and the war in Ukraine, and inflation increasingly makes its economic effects known, investors have once again been impelled to find a source of refuge from the bulls that are bringing large sectors of this market down. One such sanctuary is to utilize a covered-call investment strategy.

For those who are less seasoned investors, a covered-call strategy is when an investor writes calls against a stock that he or she owns and then collects the premium when the option expires. This strategy can continue ad infinitum until the trader decides to sell the stock.

While this can be done on a stock-to-stock basis, it can also be done more efficiently under the umbrella of an exchange-traded fund (ETF). An example of such a fund is the Global X S&P 500 Covered Call ETF (NYSEARCA: XYLD). Specifically, XYLD writes one-month, at-the-money call options on the index of S&P 500 stocks that it holds.

Currently, the fund’s top holdings include Apple Inc. (NASDAQ: AAPL), Microsoft Corp. (NASDAQ: MSFT), Amazon.com, Inc. (NASDAQ: AMZN), Tesla Inc. (NASDAQ: TSLA), Alphabet Inc. Class A (NASDAQ: GOOGL), Alphabet Inc. Class C (NASDAQ: GOOG), Berkshire Hathaway Class B (NYSE: BRK.B) and UnitedHealth Group Inc. (NYSE: UNH).

As of May 3, XYLD has been down 4.15% over the past month and 0.50% for the past three months. It is currently down 2.87% year to date.

Chart courtesy of www.stockcharts.com

The fund has amassed $1.57 billion in assets under management and has an expense ratio of 0.60%.

In short, while XYLD does provide an investor with a way to use covered calls, this kind of ETF may not be appropriate for all portfolios. Thus, interested investors always should conduct their due diligence and decide whether the fund is suitable for their investing goals.

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As always, I am happy to answer any of your questions about ETFs, so do not hesitate to send me an email. You just may see your question answered in a future ETF Talk.

Jim Woods

Jim Woods is a 20-plus-year veteran of the markets with varied experience as a broker, hedge fund trader, financial writer, author and newsletter editor. Jim is the editor of Successful Investing, the Bullseye Stock Trader, and The Deep Woods (formerly the Weekly ETF Report). His books include co-authoring, “Billion Dollar Green: Profit from the Eco Revolution,” and “The Wealth Shield: How to Invest and Protect Your Money from Another Stock Market Crash, Financial Crisis or Global Economic Collapse.” He’s also ghostwritten many books and articles, as well as edited content for some of the investment industry’s biggest luminaries. His articles have appeared on many leading financial websites, including StockInvestor.com, InvestorPlace.com, Main Street Investor, MarketWatch, Street Authority, Human Events and many others. Jim formerly worked with Investor’s Business Daily founder William J. O’Neil, helping to author training courses in the CANSLIM stock-picking methodology. The independent firm TipRanks rates Jim the No. 3 financial blogger in the world (out of more than 6,000). TipRanks calculates that, since 2012, he's made 361 successful recommendations out of 499 total, earning a success rate of 72% and a +15.3% average return per recommendation. He is known in professional and personal circles as “The Renaissance Man,” because his expertise includes such varied fields as composing and performing music; Western horsemanship, combat marksmanship, martial arts, auto racing and bodybuilding. Jim holds a BA in philosophy from the University of California, Los Angeles, and is a former U.S. Army paratrooper. A self-described “radical for capitalism,” he celebrates the virtue of making money from his Southern California horse ranch.