SPYI Offers No Compelling Benefit Over Other Covered Call ETFs

seekingalpha08-27

Exploring the nuances of the Neos S&P 500 High Income ETF (SPYI), I've concluded there's little appeal to holding this ETF. SPYI's exposures may suit some investor portfolios, but the strategy...

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GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4717344-spyi-offers-no-compelling-benefit-over-other-covered-call-etfs><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Exploring the nuances of the Neos S&P 500 High Income ETF (SPYI), I've concluded there's little appeal to holding this ETF.\n        SPYI's exposures may suit some investor portfolios, but the strategy...</p>\n\n<a href=\"https://seekingalpha.com/article/4717344-spyi-offers-no-compelling-benefit-over-other-covered-call-etfs\">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":"AGNG","symbol_name":"Global X Aging Population ETF","start_time":0,"source_url":"https://seekingalpha.com/article/4717344-spyi-offers-no-compelling-benefit-over-other-covered-call-etfs","article_id":"2462191521","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/2166996755/image_2166996755.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2462191521","pubTimestamp":1724769202,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"Exploring the nuances of the Neos S&P 500 High Income ETF , I've concluded there's little appeal to holding this ETF.SPYI's exposures may suit some investor portfolios, but the strategy limits the amount of income potential, amongst other detractors.Investors comfortable with at-the-money call writing as opposed to out-of-the-money calls should be able to easily replicate SPYI's exposures while avoiding 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via Getty Images Those who are familiar with my work since reemerging as an independent analyst will know that I'm fond of the opportunities that can be found in less traditional investment securities as well as overlaying multiple positions for a desired exposure/impact. Since this article deals with covered call funds, I encourage those who have not already read my my article featuring the Global X Nasdaq 100 Covered Call ETF (QYLD) to do so, where I strategically combine the QYLD with Nasdaq 100 (NDX) Futures. The original article, QYLD And Contango Capture For Possible 15% Yield was published in May, while the follow-up was published in early August. Thanks to a fellow contributing analyst, The Gaming Dividend, I've discovered a covered call ETF that wasn't previously on my radar: the Neos S&P 500-R High Income ETF (BATS:SPYI). Their article positions SPYI has having structural advantages over other covered call ETFs, but I quite disagree with that. There's no free lunch here, and anything one covered call ETF offers that another doesn't can be attributed to an offset somewhere along the line. Let me begin by reviewing, and then contrasting, SPYI and the Global X S&P 500 Covered Call ETF (XYLD). XYLD is QYLD's cousin, applying a covered call strategy to S&P 500 holdings instead of the Nasdaq 100. Global X S&P 500 Covered Call ETF Global X Management Company LLC runs a series of covered call funds for investors. Some of them are quite unique, such as the Aging Population ETF (AGNG) or the Interest Rate Hedge ETF (RATE). Global X's offerings in covered call strategies include the aforementioned QYLD, XYLD, the Global X Russell 2000 Covered Call ETF (RYLD), and the Global X Dow Jones Covered Call ETF (DJIA). All 3 of these Covered Call ETFs managed by Global X apply the same strategy. The ETFs hold securities representing the underlying index, be it the S&P 500 (SP500), Nasdaq 100, Russell 2000 (RTY), or Dow Jones Industrial Index (DJI) and subsequently sell call options at the market price, or slightly above the market price.  Global X produces a monthly report on its covered call strategy funds; readers can find the report for July 2024 here. Page 4 of that report provides the high-level information about the 4 covered call ETFs the company manages. The one notable difference between these ETFs is that due to the difficulty of investing in the sometimes illiquid companies comprising the Russell 2000, RYLD may invest in the index itself as opposed to the individual holdings. Covered Calls I won't provide a full tutorial on Covered Calls here, and those who'd like to read more can reference Seeking Alpha's educational article on the topic. In short, covered calls strategies have the following characteristics:  Income is earned from selling call options, represented by the premium of the option sold. The fund/portfolio foregoes benefits from stock upside above the strike price (exercise price) of the call option contracts. There's no protection from downside stock price movements. Higher implied volatility results in higher call option premiums. Options contracts must be rolled whenever they are set to expire.  Global X covered call strategy for XYLD and its other covered call ETFs  The 4 basic covered call ETFs run by Global X all aim to sell covered calls at the market price. In practice, that's not achievable, and the reason is simple: stock prices generally trade at prices for which there is no exact option strike. For example, shares of Alphabet (GOOG) were recently trading at $168.80, but the nearest option strikes (depending on expiry) were $167.50 and $170.00. There would be no option strike available at exactly $168.80, and so Global X will usually sell the closest option available above the market price.  Given the strategy to sell call options at-or-just-above the market price, XYLD foregoes nearly all upside appreciation in the underlying stocks. Almost all capital gains earned on those underlying stocks will be offset by losses on the call options Global X has written. On the flip side, by writing options near the market price, XYLD earns a high rate of income from the option premiums.   Global X, cropped by authorThe level of monthly premiums earned by XYLD will change due to varying implied volatility and the exact spread between market prices and the option strikes at the time of writing the option. If I've calculated it correctly, XYLD has earned more than 19% in option premiums over the past 12 months and distributed approximately half of that (>9.5%) to unitholders over the past year. Neos S&P 500 High Income ETF structure and strategy The fundamental strategy of the SPYI is essentially the same as for QYLD; the fund owns the underlying securities of the S&P 500 and generates income via selling covered calls on the index. However, and as promoted by the recent article by The Gaming Dividend, the SPYI ETF offers potential to profit from upside appreciation in the stock market, while QYLD does not. That seems accurate, as a presentation from Neos includes the following slide:   Neos(Source: Fund Overview video at https://neosfunds.com/spyi/#performance) Fund managers of SPYI may sell options at strike prices that are above the market (=Out of The Money). This allows the ETF the potential to realize gains from stock appreciation representing the gap between the original market price and the (higher) exercise price of the options sold. Additionally, SPYI managers might not write options on the entire long portfolio of equities. By leaving some equity unhedged by written options, the stock portfolio can realize some upside profit that isn't offset by losses on the covered calls. Finally, SPYI managers may decide to purchase call options that are more out-of-the-money than the calls written. This would benefit the portfolio should stocks post significant gains prior to the expiry of those calls purchased. My Assessment of SPYI There's nothing wrong with how Neos constructs its investment exposures within the SPYI ETF. But does it offer superiority over XYLD and other standard covered call funds: No, it does not. Here are the negative offsets to Neos' extension strategy for SPYI:  Out-of-the-money options bring in significantly less income. As an example, with the SPDR S&P 500 Trust ETF (SPY) currently trading at about $561, September 20, 2024 At-The-Money call options on SPY would earn about $870 in option premium per contract. In contrast, a September call written at an exercise price of $566 would only yield about $585 of option premium. Said another way, the strategy would give up 33% of its potential option premium income just by writing a call option ~1% higher than the current market price. Leaving a portion of the equity portfolio uncovered by written call options achieves the same thing: reduced premium income. The math is straightforward, as a portfolio that is only covered by 80% in covered calls will earn 20% less in premium than if the entire portfolio had calls written against it. Purchasing far-out-of-the-money calls is largely a hail mary. Such options may be cheap to purchase, but carry low Delta values. Those with higher Deltas would carry higher Theta and be more vulnerable to time decay. There's a significant chance far-out-of-the-money options expire worthless.  Summary / Recommendations The exposures that covered call ETF SPYI make available serves as an extension to what classic covered call ETFs offer. It's kind of like an expansion set for your favorite board game - you get a few bells and whistles to accompany the basics. Are the bells and whistles SPYI provides worth it? My opinion is that while the set of exposures SPYI offers could suit a particular investor better than XYLD based on their needs and outlook, there's little benefit to holding SPYI in one's portfolio, since investors should be able to achieve much the same exposure themselves for less. For starters, investors are paying a 0.68% management fee for SPYI, higher than XYLD at 0.61%, even though most of the extension exposures could be achieved without subjecting more investment capital to fees. For an investment allocation of $25,000, for example, SPYI might only offer an 80% covered call ratio, meaning only $20,000 of call coverage. A given investor with $25,000 could easily achieve the same via investing $20,000 in XYLD (expense ratio of 0.60%) and the remaining $5,000 in an S&P 500 index fund like SPY or VOO (expense ratio <0.10%). Doing so would generate the same 80% covered call ratio, affording 20% to upside appreciation potential, but without subjecting the extra $5,000 of Neo's 0.68% management fee. Individual investors could also periodically purchase far-out-of-the-money call options on their own, if they wished for the hail mary upside potential. I view that aspect of SPYI's offering mostly as a marketing gimmick.  The one element of SPYI's structure that would be difficult for individual investors to implement via a combination of XYLD with some supplementary positions would the somewhat-out-of-the-money call option writing (as opposed to at-the-money). Again though, my personal view is that the significant cut in premium income potential from slightly higher call strikes is particularly costly, and not of interest to me if I'm primarily aiming to generate income. Risks  The risk with any call-writing ETF like XYLD or SPYI is when markets suffer significant declines. The call option premium income would offset some of the market losses, but only to a certain point. Significant losses for major indices like the S&P 500 (SPX) would also result in large losses for ETFs such as XYLD and SPYI.For those worried about downside risk, you may consider the combination QYLD + Short Futures strategy I've laid out previously. Here's my most recent article on the topic.  I haven't evaluated the tax-efficiency of these strategies since it depends very much on your country domicile and the type of account you may be holding a covered call ETF in.","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":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/2462191521"}