Global X has expanded its suite of covered call strategies with the launch of a new fund based on the US small-cap Russell 2000.
Global X now offers seven covered call ETFs collectively housing nearly $10bn in assets.
The Global X Russell 2000 Covered Call & Growth ETF (RYLG US) has been listed on NYSE Arca with an expense ratio of 0.60%.
The fund is linked to the Cboe Russell 2000 Half BuyWrite Index which consists of a long position in the Russell 2000 combined with a systematic covered call overlay.
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 more income (the additional income from option premium) than the asset would otherwise provide on its own from dividends or other distributions.
Historically, during bear markets, range-bound markets, and modest bull markets, covered call strategies have generally outperformed their underlying securities. However, during strong bull markets, when the underlying securities may frequently rise through their strike prices, covered call strategies historically have tended to lag.
In terms of the new ETF’s strategy, the fund writes one-month at-the-money call options on the Russell 2000 corresponding to 50% of the value of the fund’s portfolio. The strategy, therefore, aims to provide regular income while still allowing investors to capture half the upside potential of the underlying index.
This approach differentiates the fund from the existing Global X Russell 2000 Covered Call ETF (RYLD US) which systematically writes call options on 100% of the portfolio’s value. RYLD houses $1.3 billion in assets and also has an expense ratio of 0.60%.
Beyond these two funds based on the Russell 2000, Global X also offers a further five ETFs within its covered call series including funds based on the S&P 500, Nasdaq 100, and Dow Jones Industrial Average. Collectively, the suite houses $9.7 billion in assets under management.
According to Global X, covered call strategies may appeal to yield-seeking investors who are keen to avoid the duration risk posed by traditional fixed income asset classes amid rapidly rising interest rates.
Rohan Reddy, Director of Research at Global X ETFs, said: “As investors weigh the impact of continued central bank rate hikes and stubborn inflation, Covered Call & Growth Strategies can be an effective way to navigate choppy and sideways markets. This fund leverages Global X’s expertise to offer covered calls on the Russell 2000 index of small-cap stocks, helping diversify income portfolios away from traditional sources in an uncertain environment while still allowing investors to capture potential upside.”