Global X has rolled out its second ‘buy-write’ ETF in Europe with the launch of a fund delivering a systematic covered call strategy based on the S&P 500.
Rob Oliver, Head of Business Development for Global X ETFs in Europe.
The Global X S&P 500 Covered Call UCITS ETF has been listed on London Stock Exchange in US dollars (Ticker: XYLU LN) and pound sterling (XYLP LN) as well as on Deutsche Börse Xetra in euros (XY7D GY).
After slumping 19.5% in 2022, the S&P 500 is bouncing back this year with a year-to-date gain of 17.9% (data as of 13 July). Despite the positive showing, many investors remain wary of equities going into the second half of the year as the global macroeconomic picture remains murky and the Federal Reserve may resume raising interest rates after a brief hiatus.
Rob Oliver, Head of Business Development for Global X ETFs in Europe, commented: “The US market is at a crossroads as the US Federal Reserve continues to raise rates and 10-year treasury yields increase, and investors are seeking returns in a potentially trendless market.
“XYLU, Global X’s second addition to its income suite of products in Europe, may help investors to capitalize on elevated premiums while retaining some upside potential in the US market.”
Methodology
The fund uses a total return swap to track the Cboe S&P 500 BuyWrite 15% WHT Index which combines a long position in the S&P 500 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 the option’s premium) than the asset would otherwise provide on its own from dividends or other distributions.
The index writes one-month call options on the S&P 500 for 100% of the portfolio’s value. The call options are written at-the-money and are rolled on a monthly basis.
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.
While covered call strategies do limit upside participation, they can generate steady income during turbulent periods and diversify an investor’s sources of yield away from equities and bonds which historically have struggled during rising rate environments.
The ETF comes with an expense ratio of 0.45%. Distributions are made to investors on a monthly basis.
Global X’s income suite in Europe also consists of an ETF delivering a systematic covered call strategy based on the Nasdaq 100. The Global X Nasdaq 100 Covered Call UCITS ETF (QYLD LN), which launched in November 2022, also comes with an expense ratio of 0.45% and currently houses $20 million in assets.