Global X launches half-covered S&P 500 and Nasdaq 100 ETFs

Sep 23rd, 2020 | By | Category: Alternatives / Multi-Asset

New York-based Global X has expanded its suite of covered call ETFs with the introduction of two new funds providing 50% covered exposure to the S&P 500 and Nasdaq 100 indices.

Rohan Reddy, Research Analyst at Global X

Rohan Reddy, Research Analyst at Global X.

The Global X S&P 500 Covered Call & Growth ETF (XYLG US) and Global X Nasdaq 100 Covered Call & Growth ETF (QYLG US) have listed on NYSE Arca and Nasdaq Exchange respectively.

Each fund comes with an expense ratio of 0.60%.

A covered call is an options strategy whereby an investor holds a long position in an asset and sells (or writes) call options on that same asset in an attempt to generate additional income (the proceeds of the option premium) than the asset would otherwise provide on its own from dividends or other distributions.

Traditional covered call strategies, where out-of-the-money call options are written on the full portfolio value, have historically outperformed the underlying securities during bear markets, range-bound markets, and modest bull markets, depending of course on the strike price of the options. However, during strong bull markets, when the underlying securities rise significantly above their strike price, this strategy has tended to lag.

Partially covered ETFs, where only a portion of the portfolio has calls written on it (in this case, half), offer a balance between additional income generation and upside participation. Such a strategy can appeal to equity investors seeking yield but who don’t want to miss out entirely on potential strong bull market gains, so-called opportunity risk.

Index strategy

The ETFs’ underlying indices, the CBOE S&P 500 Half BuyWrite Index and CBOE Nasdaq-100 Half BuyWrite V2 Index, consist of the stocks in the S&P 500 or Nasdaq 100 respectively as well as written call options on these indices for approximately 50% of the portfolio value. The call options are written at-the-money and have expiration dates maturing in the following month. Call options are rolled on a monthly basis.

Compared to a fully covered covered-call strategy, this half-covered approach earns less income but is able to participate in 50% of the stock market’s upside potential.

Rohan Reddy, Research Analyst at Global X, commented, “In this extraordinarily low rate environment, investors continue to eagerly explore alternatives to fixed income. Increasingly, they are utilizing covered call strategies because of their high yield potential and minimal duration risk.

“Yet as markets touch on all-time highs, it’s become clear that investors want a balanced approach that can offer both higher yield and participation in the market’s growth. We’re thrilled to be bringing XYLG and QYLG to our clients as a solution for modern market dynamics.”

Global X offers a further three covered call ETFs which differ by writing call options on the entirety of their underlying indices – the S&P 500, Nasdaq 100, and Russell 2000. Collectively, the suite houses over $1.3bn in assets under management.

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One Comment to “Global X launches half-covered S&P 500 and Nasdaq 100 ETFs”

  1. Ron Wasserman says:

    You should team up with Juan de la Hoz from Seeking Alpha.
    He can write articles on these types of covered call funds which I can’t analyze myself in the limited time frame that they exist.

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