The Global X Russell 2000 Covered Call ETF writes Call options using 1-month At-The-Money strikes along equity exposure to the Russell 2000 Index via another ETF.
While RYLD started in 2019, reviewing the Cboe Russell 2000 BuyWrite Index provides a longer period to evaluate. As expected, writing ATM calls can cause performance to suffer at times.
As long as investors understand the pros and cons of the RYLD ETF executing this strategy, then RYLD gets a Bullish rating from my viewpoint for income-focused investors.
bopav/iStock via Getty Images Introduction
A popular strategy when bonds are yielding below inflation and the risk of bond price declines is high is investing in funds that use option strategies to generate the income investors desire or need to pay their bills. The Global X Russell 2000 Covered Call ETF ( RYLD ) uses what is known as Buy/Write strategy to provide a double-digit yield. As long as investors know what they are giving up or not getting by an ETF executing this strategy, then RYLD gets a Bullish rating from my viewpoint for investors focused mainly on income. Exploring the Russell 2000 Covered Call ETF
Data by YCharts Seeking Alpha describes this ETF as The fund invests directly and through derivatives in stocks of companies operating across diversified sectors. It uses derivatives such as options to create its portfolio. It invests in growth and value stocks of small-cap companies. The fund seeks to track the performance of the Cboe Russell 2000 BuyWrite Index. RYLD start in April 2019. Source: seekingalpha.com
RYLD has $535m in assets and the TTM yield is 11.5%. Fees are 60bps, scheduled to go to 70bps in early 2022 when the cap is removed.
The holdings are very simple: Cash, one Call Option and one ETF. I will cover more about the Call option strategy later, but this option most likely was sold on 10/18/21 when the underlying index, the Russell 2000, traded near 2270. If that was the case, it was only about 1.3% OTM. Currently the ETF holdings are worth slightly more than the nominal value of the 2396 Calls held. If the expire OTM, RYLD would see its value go up by the current negative value of the options, or about $12,000,000. As of today, the Index is just below the strike price of the Call option.
RYLD gets its equity exposure to the R2000 Index by owning the Vanguard Russell 2000 ETF ( VTWO ), which as the name states, owns the roughly 2000 Mid- and Small-Cap stocks that comprise that Index. Source: investor.vanguard.com
Even investors focused on income should be aware of and concerned about the relative value of the assets held as a major portion of the total return results from how VTWO performs. Compared to the S&P 500 Index, the R2000 has a lower Technology weight and larger allocation to Health Care. How an investor feels about those sectors will come into play if deciding between Cover-Call ETFs. Source: seekingalpha.com Holdings
With over 2000 stocks, VTWO’s performance is not driven by any one or even small group of stocks. Option writing policy
Since RYLD measures itself against the Cboe Russell 2000 BuyWrite Index , they use an option strategy that matches what the Index does in theory. RYLD’s Prospectus explains the procedure used as: Each calendar month, the Fund will write (sell) a succession of one-month call options on the Reference Index and will cover such options by holding the component securities of the Reference Index, or in investments that have economic characteristics with substantially identical economic characteristics of such component securities, either individually or in the aggregate. Each option written will have an exercise price generally at or above the prevailing market price of the Reference Index; be traded on a national securities exchange; be held until expiration (i.e., generally the third Friday of the month) and be settled based on the final settlement price of the option; expire on its date of maturity (in the next calendar month); only be subject to exercise on its expiration date; and be settled in cash. As Index options settle in cash, a purchaser of the call options written by the Fund is entitled to receive a cash payment from the Fund if the Index closes above the option’s strike price. Payment is equal to the difference between the value of the Reference Index and the exercise price of the option. RLYD profits from the option trade as long as any payout is less than the value […]