XYLD: A Bad Idea As The S&P 500 Continues To Climb

seekingalpha07-09

The recent performance of the Global X S&P 500 Covered Call ETF reinforces our long-held view that covered call option strategies on the S&P 500 are a bad idea.Although some investors may be willing ...

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}\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nXYLD: A Bad Idea As The S&P 500 Continues To Climb\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-07-09 16:15 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4703079-xyld-a-bad-idea-as-the-s-and-p-500-continues-to-climb><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>The recent performance of the Global X S&P 500 Covered Call ETF reinforces our long-held view that covered call option strategies on the S&P 500 are a bad idea.Although some investors may be willing ...</p>\n\n<a href=\"https://seekingalpha.com/article/4703079-xyld-a-bad-idea-as-the-s-and-p-500-continues-to-climb\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"SDS","symbol_name":"两倍做空标普500ETF","start_time":0,"source_url":"https://seekingalpha.com/article/4703079-xyld-a-bad-idea-as-the-s-and-p-500-continues-to-climb","article_id":"2450857097","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1542412757/image_1542412757.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2450857097","pubTimestamp":1720512919,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"The recent performance of the Global X S&P 500 Covered Call ETF reinforces our long-held view that covered call option strategies on the S&P 500 are a bad idea.Although some investors may be willing t","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"SDS":"两倍做空标普500ETF","BK4581":"高盛持仓","BK4504":"桥水持仓",".SPX":"S&P 500 Index","OEX":"标普100","VOO":"Vanguard标普500ETF","UPRO":"三倍做多标普500ETF","SH":"标普500反向ETF","IVV":"标普500指数ETF","BK4534":"瑞士信贷持仓","SSO":"两倍做多标普500ETF","BK4585":"ETF&股票定投概念","OEF":"标普100指数ETF-iShares","SPXU":"三倍做空标普500ETF","BK4559":"巴菲特持仓","XYLD":"Global X S&P 500 Covered Call ETF","SPY":"标普500ETF","BK4588":"碎股","BK4550":"红杉资本持仓"},"translate_title":"XYLD：随着标普500继续攀升，这是一个坏主意","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"XYLD":1,"VOO":1,"SPY":1,".SPX":1,"OEF":0.6,"UPRO":0.6,"SSO":0.6,"SPXU":0.6,"SH":0.6,"SDS":0.6,"OEX":0.6,"IVV":0.6,"ESmain":0.6},"content_text":"The recent performance of the Global X S&P 500 Covered Call ETF reinforces our long-held view that covered call option strategies on the S&P 500 are a bad idea.Although some investors may be willing to cap returns in exchange for a steady source of income, periodically selling a portion of equities effectively achieves the same outcome.In a bullish equity market, XYLD severely underperforms while leaving investors exposed to most of the downside risk.We demonstrate that not only do sharp losses in a bear market risk wiping out cumulative returns from XYLD over several years, but the recovery to breakeven may potentially take longer.Judging from the behaviour of previous bull markets, we argue that the higher the equity market climbs, the riskier covered call strategies become.   Richard Drury/DigitalVision via Getty Images The recent performance of the Global X S&P 500 Covered Call ETF (NYSEARCA:XYLD) reinforces our long-held view that a covered call option strategy on the underlying S&P 500 Index (SP500) is a bad idea. While the potential of earning attractive option premiums even in flat markets may seem like a great idea at first, covered call strategies ultimately do not provide any meaningful advantage for investors. The only exception being that one happens to be a market wizard capable of precisely timing flat markets. When we shared our skeptical view on XYLD a year ago with an article titled \"XYLD: Why Covered Calls On The S&P 500 Is A Bad Strategy - Jun 30, 2023\", we generated some interesting debates among our readers. Amongst the various arguments in favour of covered call strategies, we felt that retirees' unique preference for a steady yield as supplementary income might be the most relatable and relevant one. Although we can certainly appreciate that some investors may be willing to cap returns in exchange for a steady source of income in the form of option premiums, we argue that periodically selling a portion of equities would effectively achieve the same outcome. Selling Shares For Income To make our point, we note that XYLD has generated a total return of 9.1% since our article was published, while the S&P 500 Index returned 27.0% over the same period. Investing in the S&P 500 over the same period would have given an investor almost three times (2.97x) the return on XYLD. Data by YCharts Thus, every $100 invested in the S&P 500 at the beginning will be worth $127 by the end of the period. An investor then only needs to liquidate $9.10 worth of shares to achieve the same return as XYLD while still holding a portfolio worth more than the initial investment ($117.90). According to figures provided by the fund issuer, XYLD currently offers the highest annualized yield since the ETF's inception in 2013. In previous years, yields were much lower due to the low interest rate environment, which has a direct impact on option premiums. Investors should thus note that 9.1% returns are not likely to last unless one is convinced that high interest rates are here to stay. Global X Should equities continue to deliver above 8%—9% returns in the coming years, which is consistent with the asset class's historical performance, XYLD is likely to severely underperform over time. An investor will be better off staying invested in equities and regularly selling a portion of shares to match returns on XYLD. The Illusion Of Attractive Yields & Safety Just as we have warned, covered call strategies such as the XYLD risk forgoing any excess returns from the performance of the underlying asset. Therefore, in a bullish uptrend, investors in XYLD severely underperform the market in return for yield. Even worse, investors holding XYLD continue to bear most of the downside risk in the event of a bear market. Below is a diagram comparing three different scenarios and simulated performance for covered call strategies versus the underlying asset.   Global X Presentation Because the magnitude of losses in a bear market may potentially be much larger than the cumulative returns from option premiums, investors caught holding on to covered call strategies in a bear market face a double whammy. Not only do sharp losses in a bear market risk wiping out cumulative returns from XYLD over several years, but the recovery to breakeven may potentially take longer. To demonstrate this, below is a chart comparing the normalized total returns of XYLD since inception (June 2013) versus the S&P 500. Notice the large drawdowns on both assets during bear markets in 2020 and 2022, with the XYLD suffering a slightly smaller decline versus the S&P 500 because option premiums helped to offset some of the losses. Nonetheless, these drawdowns could still potentially wipe out several years worth of returns on XYLD. For example, while the bear market erased 33 months' worth of cumulative gains on the S&P 500 in 2020, it erased as much as 45 months of gains on XYLD. The same thing happened in 2022 when the bear market erased 22 months of gains on both the S&P 500 and XYLD. TradingView.com, Stratos Capital Partners More importantly, notice that the time taken to fully recover from a bear market may be much longer for XYLD than that of the S&P 500. This is partly by design because returns on covered call strategies such as XYLD are capped, unlike the S&P 500. TradingView.com, Stratos Capital Partners During the bear market of 2020, XYLD took around 397 days to fully recover, while the S&P 500 only took 173 days. TradingView.com, Stratos Capital Partners During the bear market of 2022, XYLD took around 686 days to fully recover, while the S&P 500 took only slightly longer, at 707 days. We identified three key variables that determine the length of recovery for XYLD in a bear market: the depth of the drawdown, the speed of the recovery, and the existing yield on XYLD. Deeper drawdowns tend to be followed by strong equity returns during subsequent rebounds, which lead XYLD to underperform simply because returns are capped. A quick recovery (like in 2020) also tends to be unfavourable for XYLD because returns are capped while yields only accumulate with time. Finally, higher yields aid in providing a steady source of strong returns when the equity market is generating low-to-flat returns and taking longer to recover. However, what is clear to us is that equity returns eventually catch up to and overtake returns on XYLD on a cumulative basis. Overall, equity returns have a clear advantage over XYLD due to the asset class's historically consistent returns of 8%—9%. And this is especially true over long investment horizons. Only in certain circumstances do XYLD outperform, such as when yields are high and close to equity-like returns or when equity markets are stuck in a sideways trend for an extended period of time. Speculators In Denial Of course, some may accuse us of making an unfair comparison, given that we are comparing performance during a bull market. However, the data clearly shows that the S&P 500 has meaningfully outperformed XYLD since the fund's inception. And we are confident that the results will be similar over even longer time frames. Judging from the behaviour of previous bull markets, we would even argue that the higher the equity market climbs, the riskier covered call strategies become. Not only do equity markets rarely go into an extended sideways trend after making successive record highs, but they are more likely to push even higher or eventually plunge into a bear market.  Based on the points we have discussed, we hope that we have built a convincing case that XYLD's underperformance, especially over long periods of time, is by design instead of circumstances. Add XYLD's expense ratio of 0.6% to that equation, and it should be clear that investors should stay away from covered call strategies unless they are intent on betting on a sideways market. In fact, covered call option strategies have traditionally been a tool for speculative options traders rather than for retirees. The popular argument of \"knowing when to use XYLD as an appropriate tool\" then boils down to the age-old illusion that one can time markets with precision. Advocates of covered call strategies claim that they offer an attractive yield in an otherwise flat market. That is only true given the condition that one knows that the market is headed sideways and not higher.  Unfortunately, that is a moot point. If one can truly foresee market direction with better skill than monkeys throwing darts, one wouldn't need tools like XYLD anyway. These wizards are better off just timing markets and amassing a fortune by taking directional bets in the leveraged options market.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2450857097"}