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On April 14, 2023 at 15:55:03 ET an unusually large
$79,589.40K block of Put contracts in Tesla Motors
(TSLA) was bought,
with a strike price of $450.00 / share, expiring in 280 day(s) (on January 19, 2024).
Fintel tracks all large options trades, and the pre
Investors are awaiting earnings reports from consumer discretionary companies in coming weeks for a read on how the U.S. economy is faring amid persistently high inflation and the Federal Reserve's most aggressive rate hiking cycle since the 1980s.
Sometimes when investors (myself included) see an ETF like the
Global X S&P 500 Covered Call ETF (
NYSEARCA:XYLD)
yielding 12.4%, their immediate inclination is to hit the Buy button in their brokerage account and start collecting those massive dividends. However, this article will explain why buying a simple, low-cost S&P 500 (
SPX
) ETF like the
Vanguard S&P 500 ETF (
NYSEARCA:VOO)
or the
SPDR S&P 500 ETF (
NYSEARCA:SPY)
, even though they each sport much smaller
dividend yields of 1.6%, is likely a more fruitful strategy over the long run.
What Does XYLD ETF Do?
XYLD is a $2.5 billion ETF from Global X that, according to Global X, uses a “‘covered call’ or ‘buy-write’ strategy, in which the fund buys the stocks in the S&P 500 Index and ‘writes’ or ‘sells’ corresponding call options on the same index.” Global X states that the fund “seeks to generate income through covered call writing, which historically produces higher yields in periods of volatility.”
Essentially, XYLD is selling covered calls against the positions it owns and collects options premiums to generate additional income and achieve this high yield. This isn’t a bad strategy per se, and it certainly generates a high yield, as evidenced by
XYLD’s 12.4% yield. Global X has a number of ETFs that employ this same strategy using other major indices, such as the
Global X NASDAQ 100 Covered Call ETF (
NASDAQ:QYLD)
and the
Global X Russell 2000 Covered Call ETF (
NASDAQ:RYLD)
.
XYLD has a consistent track record as a dividend ETF -- it has made monthly payouts for nine years in a row. Furthermore, XYLD deserves credit for growing its annual dividend payout substantially over the last few years. After reducing its annual payout from $3.15 in 2018 to $2.79 in 2019, the dividend has come roaring back, with annual payouts of $3.11 in 2020, $4.58 in 2021, and $5.29 in 2022.
XYLD is a diversified ETF -- as an S&P 500 ETF, it holds 505 positions, and its top 10 holdings account for under 30% of assets. Below, you’ll find a comprehensive overview of XYLD stock's top holdings using TipRanks’ holdings screen.
XYLD’s top holdings mirror that of the S&P 500 itself. Apple (
NASDAQ:AAPL
) is the top holding with a 7.3% weighting, followed by Microsoft (
NASDAQ:MSFT
) with a 6.5% weighting.
The rest of the top 10 consists of mega-cap tech names like Amazon (
NASDAQ:AMZN
), Nvidia (
NASDAQ:NVDA
), both share classes of Alphabet (
NASDAQ:GOOG
) (
NASDAQ:GOOGL
), Tesla (
NASDAQ:TSLA
), and Meta Platforms (
NASDAQ:META
), plus non-tech mega caps Berkshire Hathaway (
NYSE:BRK.B
), UnitedHealth Group (
NYSE:UNH
) and ExxonMobil (
NYSE:XOM
).
This is a strong collection of blue-chip stocks, and you’ll notice that they collectively boast strong
Smart Scores. Apple, Amazon, Microsoft, Nvidia, Alphabet, Tesla, and UnitedHealth Group all have Smart Scores of 8 out of 10 or above, equivalent to an Outperform rating based on TipRanks' proprietary system.
XYLD stock itself enjoys a strong Smart Score of 8 out of 10 and screens positively on other factors that TipRanks monitors, like Blogger Sentiment and Crowd Wisdom.
Additionally, the analyst community has a relatively favorable outlook on XYLD. It has a Moderate Buy consensus rating from analysts, and the
average XYLD stock price target of $46.31 implies 13.8% upside potential.
Of the 6,317 analyst ratings on XYLD, 57.81% are Buys, 36.57% are Holds, and 5.62% are Sells.
One Negative About XYLD to Consider
Between this strong collection of holdings, monthly payout, and 12.4% yield, XYLD certainly has its appeal to income investors. However, one thing that investors should note is that selling covered calls against these positions will cap some of XYLD’s upside in an environment where the S&P 500 is performing well, so you are more or less making a partial tradeoff between yield and capital appreciation.
Furthermore, there’s another factor investors should consider before jumping in based on this mouth-watering yield.
XYLD's Long-Term Performance vs. SPY and VOO
XYLD has posted a very respectable annualized total return (capital appreciation plus reinvested dividends) of 11.26% over the past three years, so it is certainly not a long-term loser or an investment that has lost money. However, believe it or not, based on total return, this complex strategy has actually trailed simply investing in the S&P 500 through a vanilla strategy like the aforementioned Vanguard S&P 500 ETF or SPDR S&P 500 ETF over the same time frame.
That’s because the Vanguard S&P 500 ETF and the SPDR S&P 500 ETF have both returned an even more impressive 15.4% on an annualized basis over the past three years.
Going out to a five-year time horizon, the gap in performance becomes more pronounced. Over the past five years, XYLD has had an annualized total return of about 5.1%, while VOO and SPY have returned 10.9% and 10.8%, respectively, more than doubling the total return of the Global X S&P 500 Covered Call ETF. While investors didn't lose money, there was a significant opportunity cost here over the past decade.
I will give XYLD credit as its high yield helped it to outperform the plain S&P 500 ETFs in 2022 when it lost 12.1% versus losses of 18.2% for VOO and SPY. However, zoom out, and you'll see that just a few months into 2023, VOO and SPY are back on top with identical losses of 5.3% versus a loss of 7.2% for XYLD now that the broader market is rebounding.
See below for
a chart comparing the performance of XYLD, VOO, and SPY over the last three years using TipRanks’ ETF Comparison Tool. (Note that this chart is cumulative rather than annualized and that the chart line for SPY covers that of VOO due to their near-identical performance).
Investor Takeaway
Over the years, despite its more exotic strategy, XYLD has trailed the simple strategies of the S&P 500 ETFs like VOO and SPY. What’s more, XYLD investors are paying much more in fees for this performance (or underperformance) than investors of VOO or SPY. XYLD’s expense ratio of 0.6% is more than six times higher than SPY’s investor-friendly 0.09% expense ratio and an incredible 20 times higher than VOO’s minuscule 0.03% expense ratio.
See below for a comparison of fees using TipRank’s ETF Comparison Tool.
The holdings of VOO and SPY are nearly identical to those of XYLD, just without the layer of complexity added in, so an investor in those ETFs is still getting exposure to the same group of blue-chip holdings with strong Smart Scores.
Ultimately, the double-digit yield and monthly payout of XYLD are tempting, especially for income investors. However, to build a larger overall portfolio with better total returns, investors can likely benefit from keeping it simple and investing in either VOO or SPY.
Disclosure
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