XYLD: There Are Better Alternatives

seekingalpha2024-11-26

Despite reduced market volatility, XYLD's aggressive covered-call strategy still results in permanent losses for owners, underperforming the S&P 500 significantly as well as other short-premium funds....

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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: There Are Better Alternatives\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-11-26 10:06 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4740211-xyld-etf-underperformer-better-alternatives-available><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Despite reduced market volatility, XYLD's aggressive covered-call strategy still results in permanent losses for owners, underperforming the S&P 500 significantly as well as other short-premium funds....</p>\n\n<a href=\"https://seekingalpha.com/article/4740211-xyld-etf-underperformer-better-alternatives-available\">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":"XYLD","symbol_name":"Global X S&P 500 Covered Call ETF","start_time":0,"source_url":"https://seekingalpha.com/article/4740211-xyld-etf-underperformer-better-alternatives-available","article_id":"2486609042","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/175494583/image_175494583.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2486609042","pubTimestamp":1732586819,"columns":[],"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"Let's investigate this throughout a couple of time periods: Data by YChartsOne period that stands out to me is this 6 month~ period in 2023, which I selected from the volatility chart shown earlier in the article - the reason for selecting this time period is volatility was quite low, and then spiked higher, before dropping again. That type of environment was typically damaging for XYLD shareholders. The chart above shows the total return of XYLD vs the underlining S&P500 via the SPDR S&P500 ETF , meaning this is accounting for dividends and distributions XYLD shareholders benefitted from during the period. Unfortunately, during such market conditions XYLD continues t","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"XYLD":"Global X S&P 500 Covered Call ETF","BK4585":"ETF&股票定投概念","BK4588":"碎股"},"translate_title":"XYLD：还有更好的选择","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"XYLD":0.9},"content_text":"Despite reduced market volatility, XYLD's aggressive covered-call strategy still results in permanent losses for owners, underperforming the S&P 500 significantly as well as other short-premium funds.XYLD's aggressive strategy to sell 2% OTM short-dated options continues to underperform due to volatility whip-lashing, making it a poor investment choice compared to Alternatives.Avoiding XYLD moving forward and looking to switch holdings to SPY or PUTW will likely generate better long-term returns and income.PUTW offers better downside protection and income generation, outperforming XYLD in both bear and bull markets.   sbayram Around two years back, at the end of 2022, we warned against Global X S&P 500 Covered Call ETF (NYSEARCA:XYLD) and demonstrated how it was consistently underperforming markets and resulting in permanent losses for investors. You can read in detail about this in our original thesis as well as a followup article, and looking back at this fund, nothing has really changed. But in short, the fund had continued permanent losses that were caused by the fund being simply structured poorly for a high volatility environment. Essentially, the fund was following a too aggressive covered-call strategy and getting whip-lashed by volatility in 2022, resulting in every rally ripping away a portion of investors funds, while downturns barely saw benefit relative to the S&P500. In this article, we would like to revisit this thesis and inspect if it is still occurring, as market dynamics have changed since then, and we've had reduced volatility, which may have resolved XYLD's problems. Data by YChartsTo be clear, with reduced volatility, with the VIX going from around a 25~ average in 2022 and many highs well over 30 to much lower averages in the last few years, the strategy XYLD deploys may no longer be destroying capital. Let's explore this and revisit if XYLD is now a suitable investment vehicle. Volatility Whip-Lashing XYLD Back in 2022 the fund was generating permanent losses to fund holders due to selling close-to-the-money (2% OTM) covered calls in a volatile market, resulting in having shares called away and being forced to buy shares back at a higher price over and over, destroying capital of shareholders as the market chopped back and forth. Is this still occurring? Let's investigate this throughout a couple of time periods: Data by YChartsOne period that stands out to me is this 6 month~ period in 2023, which I selected from the volatility chart shown earlier in the article - the reason for selecting this time period is volatility was quite low, and then spiked higher, before dropping again. That type of environment was typically damaging for XYLD shareholders. The chart above shows the total return of XYLD vs the underlining S&P500 via the SPDR S&P500 ETF (SPY), meaning this is accounting for dividends and distributions XYLD shareholders benefitted from during the period. Unfortunately, during such market conditions XYLD continues to underperform drastically due to this volatility whip-lashing effect, performing at a total return of 4% over 6 months or so, while the S&P500 returned a hair over 17%. Data by YChartsMore recently just about 6 months back there was another such case of volatility spiking, from the VIX at 13-14 in late March up to 18 in late April, and once again the chop resulted in permanent loss for the fund. So this issue, volatility whip-lashing, appears to still be occurring from time to time. However, it's much less than back in 2022 now that the market is more uni-directional and less volatile. XYLD vs Alternatives vs S&P 500 So while volatility whip-lash is still present with XYLD that's given in any covered call ETF, and it's one reason we aren't really fans of these types of funds - as generally, their strategy is suited for low-volatility only, when selling premium (options) simply isn't a very good strategy. However, I know people often like these funds because of the slight downside protection they offer - reduced volatility - and especially the income they spin off, so let's talk about that a bit: Data by YChartsAbove is three funds, the two we've been talking about - SPY and XYLD, as well as an alternative I outlined in 2022 as a superior alternative to XYLD - namely WisdomTree's PutWrite Strategy Fund (PUTW). Once again the chart is put in the total return perspective, so it includes dividends and distributions in the total return, and as you can see just simply investing in the S&P500 is simply better over the long-term. However, it is true that in times of downside - bear markets, in particular ones that are consistently down over months rather than choppy, the S&P500 does underperform these short-premium funds, as it doesn't benefit from cost-basis reduction on the downside. However, it's clear according to the above chart, and my previous findings, that if someone is interested in the downside protection these funds offer, as well as receiving large dividends/distributions, income, that PUTW is simply a better alternative. During the bear market in early 2022 PUTW had lower volatility and downside risk compared to both XYLD and SPY, and the permanent loss that XYLD generates is not as extreme with PUTW. This results in a substantial outperformance relative to XYLD during bull markets as well. No matter how you slice it XYLD simply isn't competitive against PUTW, as both in Bear Markets as well as Bull Markets PUTW outperforms. Conclusion & Closing Thoughts Due to the continued problems XYLD has as a fund, I'd like to reiterate my rating that it is firmly a SELL, arguably a strong sell relative to alternatives. To be clear, if it's not too painful tax-wise to liquidate the position and transfer into an alternative fund such as the S&P 500 (SPY) in the case of long-term return preference, or PUTW in the case of a balanced income/return approach, it would almost certainly be wise over the long term. It's become clear that even in periods of reduced volatility, XYLD still underperforms alternatives; thus I would not go long XYLD and would strongly discourage friends and family from holding ongoing positions in the fund. Actionable Takeaways If you own XYLD or other covered-call ETFs and are bullish on the market, it's likely wise to swap them out for the standard ETF versions to stop capping your upside, as the covered-call versions seem to be underperforming drastically - or opt to switch to a short-put focused fund such as PUTW. If you own XYLD or other covered-call ETFs and are bearish on the market, it's likely wise to raise cash from these positions today and look to buy back into the non-covered call varieties a little bit lower - if you don't want the market risk, then holding your position until the market has gone down a bit, and then swapping over to a non-covered call fund when you turn neutral to bullish on the market. As mentioned in a previous article, there are some ways to replicate this short-premium strategy manually that make sense in my opinion, but they entail more risk - if that's okay with you, go check out the old actionable takeaways from a few years back. We still prefer to manually deploy this type of strategy. Risks to consider Wrapping up, I'd like to remind everyone to check into the tax consequences before making any actions, especially swapping out funds - if you're sitting on a large gain from buying in September 2022 it might not make sense to make the swap unless you have ample losses to harvest in other sectors.  I'd also like to stress that replicating the strategy XYLD deploys on your own, while it can result in higher returns, it is generally something that is not advisable as it can take too much work and can be messed up if you are not experienced. It is generally better to just opt for an alternative fund instead.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"-1","news_tag":"analysis","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":"4.29.4","shortVersion":"4.29.4","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/2486609042"}