LQDW: The Great Illusion Of 2-Digit Yields

seekingalpha08-03

Creatas/Creatas via Getty Images LQDW strategy iShares Investment Grade Corporate Bond Buywrite Strategy ETF (BATS:LQDW) is a high-yield fund with a stunning 12-month trailing yield of 14.67% and an ...

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It started investing operations on 8/18/2022, tracks the Cboe LQD BuyWrite Index and pays monthly distributions. LQDW executes a covered call strategy based on iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD). As described in the prospectus by iShares, the fund holds LQD as only long position (except cash equivalents) and sells one-month call options on this ETF to generate income. It uses European-style options, which can only be exercised on the expiration date. The short call position is rolled on the business day preceding the expiration date at a strike price closest to the prior daily closing price of LQD and an expiration in the next month. LQDW intends to write call options up to the full amount of LQD held in the portfolio. However, the fund may not write any options when the premium income would be minimal. It is important to note that: “By writing the call option(s), the Fund will not participate in market gains of the Underlying Fund above the strike price but will fully participate in any market losses if the Underlying Fund declines in value.”  Portfolio  Apart from cash and equivalents, which represent 1.5% of asset value, 99.6% of the portfolio’s value is invested in LQD. The short call position weighs -1.1%, with an expiration date on 8/16/2024 and a strike price of $109. The portfolio of LQD is quite heavy in bonds issued by banks (22.8%) and consumer staples companies (17.9%). Other sectors weigh no more than 11%.   Sector Breakdown in % of assets (Chart: author; data: iShares) As of writing, 46.6% of assets have a credit risk rated A by S&P and 44.2% is rated BBB (the lowest level of investment grade).   Credit risk profile in % of assets (Chart: author, data: iShares) About 57% has a maturity inferior or equal to 10 years, while 27.5% is above 20 years.   Maturity profile (Chart: author, data: iShares) The top 10 issuers of the bonds held in LQD are listed below. They weigh 18.9% in aggregate and none exceeds 3%, so risks related to individual companies are low.   Issuer Ticker Weight (%)   BANK OF AMERICA CORP BAC 2.64   JPMORGAN CHASE & CO JPM 2.63   MORGAN STANLEY MS 2.07   WELLS FARGO & COMPANY WFC 1.81   GOLDMAN SACHS GROUP INC GS 1.76   UNITEDHEALTH GROUP INC UNH 1.68   VERIZON COMMUNICATIONS INC VZ 1.65   CITIGROUP INC C 1.58   COMCAST CORPORATION CMCSA 1.55   AT&T INC T 1.51   Click to enlarge Performance Since its inception 2 years ago, LQDW is close to flat in total return, lagging LQD by 7%. LQDW vs LQD, total return (Seeking Alpha) More concerning, the share price has lost 28%. LQDW vs LQD, price return (Seeking Alpha) To make it worse, the cumulative inflation in the same time was about 6% (based on CPI). Shareholders have enjoyed a high yield…while losing over one third of their capital in less than 2 years, measured in inflation-adjusted value. Distribution history is not more attractive. The next chart plots monthly total distributions and their 6-month average. The average went down from $0.60 to $0.33 per share in about 18 months, losing 45%.   LQDW distribution history (Chart: author; data: iShares) LQDW vs. peers The next table compares characteristics of LQDW and two funds by the same issuer executing similar strategies in other bond categories:  iShares High Yield Corporate Bond Buywrite Strategy ETF (HYGW) iShares 20+ Year Treasury Bond Buywrite Strategy ETF (TLTW).     LQDW HYGW TLTW   Inception 8/18/2022 8/18/2022 8/18/2022   Expense Ratio 0.34% 0.69% 0.35%   AUM $177.61M $67.13M $985.85M   Average Daily Volume $1.46M $1.05M $11.07M   Dividend Yield 16.48% 13.64% 15.35%   Click to enlarge LQDW has the lowest fee and the highest yield. The chart below plots total returns since inception. LQDW lags the high-yield bond ETF and beats the treasury bond ETF. LQDW vs. Peers, total return (Seeking Alpha) The three funds are on a steady downtrend in value: LQDW vs. Peers, price return (Seeking Alpha) Takeaway  iShares Investment Grade Corporate Bond Buywrite Strategy ETF pays a 2-digit yield thanks to a covered call strategy based on the corporate bond ETF LQD. The juicy dividend is likely to attract income-oriented investors. However, historical data point to a heavy loss in capital and a shrinking average distribution in just 2 years of existence.","kind":null,"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":"4.29.1","shortVersion":"4.29.1","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/2456241774"}