Small-cap stocks are usually prized for growth and while some exchange traded funds add dividends to the small-cap mix, the asset class is historically low yielding.
The Global X Russell 2000 Covered Call ETF (Cboe: RYLD) flips that script. RYLD, which yields 12.5%, is designed to track the Cboe Russell 2000 BuyWrite Index. The fund gains exposure to the stocks in the Russell 2000 Index and writes at-the-money monthly call options on the same index.
“The fund’s strong 12.5% dividend yield, defensive options strategy, comparatively low level of risk and volatility, and outperformance during flat markets make it a strong investment opportunity for income investors and retirees, albeit one without the possibility of substantial capital gains,” according to Seeking Alpha.
RYLD ETF Perks
RYLD receives a premium from writing the call options, which can help increase the fund’s distributions and potentially mitigate downside risks.
The Russell 2000 Index primarily includes smaller market capitalization U.S. companies (small caps), those with a market value between $300 million and $2 billion. The small cap index is historically linked to increased volatility and returns relative to mid- and large-cap indices.
As volatility rises, so too does the size of the premium that can be generated by writing a call option. RYLD presents a single solution for investors looking to incorporate a small cap covered call strategy, who may otherwise need to accept significant time and expense to operate this strategy individually.
“In theory, RYLD’s options strategy means that the fund should outperform during flat markets and downturns, due to the premiums received, but underperform during recoveries and bull markets, as the upside is capped,” according to Seeking Alpha.
Covered call strategies can potentially augment a portfolio during periods of heightened volatility. The covered-call options allow 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 gather income from the option premium. While RYLD may not produce any phenomenal price returns compared to the broader equities markets, the underlying options strategy helps the fund generate outsized yields.
For more alternative investing ideas, visit our Alternatives Channel.
