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.

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.

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Author: Jim Woods