Additionally, the actively managed AdvisorShares STAR Global Buy-Write ETF (NYSEArca: VEGA) employs a covered call strategy through global stocks ETFs, including emerging markets and developed EAFE countries, along with some international bond exposure.

[related_stories]

The covered-call options strategy allows an investor to hold a long position in an asset while simultaneously writing, or selling, call options on the same asset. Traders would typically employ a covered-call strategy when they have a neutral view of the markets over the short-term and just bank on income generation from the option premium.

While these buy-write ETFs may not produce any phenomenal returns compared to the broader equities markets, their underlying option strategy helps them generate outsized yields.

For instance, HSPX gained 4.1% year-to-date while the S&P 500 rose 6.6%. However, HSPX has also generated a 4.98% 12-month yield, compared to the S&P 500’s dividend yield of just over 2.0%

QYLD is down 1.6% year-to-date while the Nasdaq Composite is 0.7% higher. QYLD, though, shows a robust 10.33% 12-month yield.

Related: Central Banks Playing Chutes and Ladders

In a flat market condition, the trader would use the buy-write strategy to generate a premium on the option. If shares fall, the option expires worthless and one still keeps the premiums on the options. However, the strategy can cap the upside of a potential rally – the trader keeps the premium generated but any gains beyond the strike price will not be realized. Consequently, in a stock market rally, the buy-write strategy has underperformed the equities market.

Through market cycles, the buy-write strategy basically replaces the long-term positive returns of the equity market with the premium generated in options pricing, foregoing capital gains from equities for yield generation.

Click here to read the full story on ETF Trends.

Full disclosure: Tom Lydon’s clients own shares of QYLD.

Subscribe to our free daily newsletters!
Please enter your email address to subscribe to ETF Trends' newsletters featuring latest news and educational events.