Buy-Write ETFs: Why Buy? The Case For JEPI, XYLD

seekingalpha08-19

Luis Alvarez Don't be upset; I don't intend to provoke anyone. Everyone has their own reasons for investing in our products, and I understand that a Buy-Write ETF might seem appealing, with an average...

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Everyone has their own reasons for investing in our products, and I understand that a Buy-Write ETF might seem appealing, with an average...</p>\n\n<a href=\"https://seekingalpha.com/article/4715644-buy-write-etfs-why-buy-jepi-xyld\">Source Link</a>\n\n</div>\n","source":"seekingalpha_fund","html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>Buy-Write ETFs: Why Buy? 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The Case For JEPI, XYLD\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-08-19 23:43 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4715644-buy-write-etfs-why-buy-jepi-xyld><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Luis Alvarez Don't be upset; I don't intend to provoke anyone. Everyone has their own reasons for investing in our products, and I understand that a Buy-Write ETF might seem appealing, with an average...</p>\n\n<a href=\"https://seekingalpha.com/article/4715644-buy-write-etfs-why-buy-jepi-xyld\">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":"IVV","symbol_name":"标普500指数ETF","start_time":0,"source_url":"https://seekingalpha.com/article/4715644-buy-write-etfs-why-buy-jepi-xyld","article_id":"2460056759","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1132122136/image_1132122136.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2460056759","pubTimestamp":1724082191,"sourceInfo":{"source_id":"seekingalpha_fund","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"Luis Alvarez Don't be upset; I don't intend to provoke anyone. Everyone has their own reasons for investing in our products, and I understand that a Buy-Write ETF might seem appealing, with an average dividend yield of over 9% and the opportunity to gain exposure to growth stocks. However, I would like to use this article to explain why, in my opinion, from a portfolio perspective, there is no compelling reason to allocate our capital to this option, as it could result in significant opportunity costs. 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Everyone has their own reasons for investing in our products, and I understand that a Buy-Write ETF might seem appealing, with an average dividend yield of over 9% and the opportunity to gain exposure to growth stocks. However, I would like to use this article to explain why, in my opinion, from a portfolio perspective, there is no compelling reason to allocate our capital to this option, as it could result in significant opportunity costs. What Is a Buy-Write ETF? I'd like to begin with a simple point: explaining what a Buy-Write ETF really is, even though I believe you're already familiar with it. This type of passive fund has captured the attention of investors since its first launch, around 2008, just before the subprime mortgage crisis. These funds combine a stock-purchasing strategy with the selling of covered call options on those same stocks. In fact, the goal of the ETF is to generate a consistent income stream. For example, if we take one of the most commonly used ETFs, the JPMorgan Equity Premium Income ETF (NYSEARCA:JEPI), with an AUM of approximately $19 billion, this objective is clearly stated in the JEPI fact sheet. JPMorgan Equity Premium Income ETF seeks to deliver monthly distributable income and equity market exposure with less volatility. Therefore, the goal of this ETF is not capital gains, but rather providing investors with an alternative solution to achieve a steady, monthly distributable income. Yield on cost (Seeking Alpha) How Does a Covered Call ETF Work? The concept behind this tool is fairly straightforward: the high dividend yield of a Buy-Write ETF is primarily the result of combining dividends from the underlying stocks with the premiums collected from selling call options. The ability to maintain a high dividend yield depends on various technical and mathematical factors. I would like to focus on options management because, as you may already know or understand, in addition to the dividends from the ETF's holdings, the premiums collected from selling call options provide a steady cash flow that is distributed to investors as dividends. It's important to remember that the ETF's objective is to provide a consistent income stream, with call options being sold regularly (e.g., monthly or quarterly). This approach enables the fund to generate steady income, even in the unlikely event that the underlying stocks do not pay high dividends. For example, take a look at how the dividend yield has evolved with another highly regarded ETF: the Global X S&P 500® Covered Call ETF (NYSEARCA:XYLD). XYLD - Dividend Growth (Seeking Alpha) That's really interesting to note because this dividend flow doesn't follow the dividend growth of the benchmark. Just take a look at the dividend yield growth chart of the SPDR® S&P 500® ETF Trust (SPY) over the last 10 years. SPY - Dividend Growth (Seeking Alpha) And now, look at the S&P 500 dividend yield S&P 500 dividend yield (Investopedia) So, it seems important to understand the covered call strategy before investing in a Buy-Write ETF. Option pricing follows the renowned Black-Scholes model. I don't want to delve into the specifics here, but if you want a deeper understanding of how call option pricing works, I suggest reading this resource. Additionally, if you're interested in how dividend yield changes, it might be helpful to look at this content. For now, it's enough to understand that the price of the underlying asset has a direct impact on the price of a call option. When the underlying price increases, the price of the call generally rises as well, since it becomes more likely that the option will be exercised at a profit. Why Buy a \"Covered-Call\" ETF? For me, this is a really good question, and I hope some investors will open an interesting discussion in the comments section. I have a deep admiration for financial engineering and strive to study each market tool, but in this context, I believe that this financial instrument incurs a significant opportunity cost. The management of covered calls means that the performance of this ETF remains closely tied to the performance of the underlying asset, mathematically speaking. The JPMorgan Equity Premium Income ETF (JEPI) was launched on May 20, 2020. To understand this parallel, it might be better to consider another passive fund as an example. For instance, XYLD has a yield of 9.27% with a five-year growth rate of 7.56%, which is not bad at all. However, the same ETF has also recorded a capital loss of -11.90% over the last 10 years. You might think: not bad. But before concluding, take a look at this chart. XYLD, XYLDwD, SPY, SPYwD (Morningstar) As we mentioned before, the covered call option creates a correlation with the underlying asset. In the case of XYLD, over 10 years, the passive fund generated a total return, including dividends, of approximately 122.24% (without using the accumulation method). In comparison, SPY gained around 245%, and when including dividends, the return was approximately 321%. But let's focus on what we really want to know. XYLD has a standard deviation of 11.31% and a beta relative to the S&P 500 of about 0.68%, while SPY's standard deviation is around 15.25%. The correlation between XYLD and SPY, when considering dividends, is quite high. Allow me to say this: investing in XYLD does not provide much diversification to a portfolio, as it follows the underlying trend of the S&P 500. One might say, \"Okay, but I'm investing in a buy-write ETF because it gives me a consistent dividend yield, which is great for my retirement portfolio.\" Maybe so, but it's not a solution that provides \"market freedom\" because financial tools like XYLD follow the performance of the S&P 500 and are not as stable or as uncorrelated with the market as one might think. It offers a less volatile approach to managing investments, but when I buy this ETF, I'm essentially buying something like the S&P 500, and the standard deviation is not significantly different. Conclusion  To sum up, I believe that \"buy-write\" ETFs are not an ideal solution in portfolio construction because they do not offer significant positive benefits to an investor, and investing in these financial tools could come with a high opportunity cost. For now, if I want exposure to the U.S. market, I would still prefer SPY. I must admit that this type of passive fund could play a role in a passive income portfolio. However, in my opinion, to create a robust passive income portfolio, it might be time to accumulate other, potentially better solutions currently available in the 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":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":2,"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/2460056759"}