Covered Call ETFs Can Diversify Income Streams | ETF Trends

Things are a bit more sanguine for income investors this year, though not 100% so, but 2022 serves as a reminder that stocks and bonds can fall in unison.

One of the takeaways from that scenario could well be that advisors and investors ought to consider adding some diversification to income-generating portfolios rather than relying fully on equities and fixed income instruments.

Options strategies can bolster and diversify a portfolio’s income streams and exchange traded funds, including the Global X Nasdaq 100 Covered Call ETF (QYLD) and the Global X S&P 500 Covered Call ETF (XYLD), make options writing easier and more cost-effective for a broader swath of investors.

As their names imply, QYLD and XYLD are covered call ETFs. Options market participants use covered calls — the selling of call contracts — to generate income and potentially profit from elevated volatility because options premiums often rise in conjunction with broader market turbulence.

This premium, in combination with some foregone upside potential, helps the strategy perform in choppy and sideways markets. Of course, depending on the moneyness of the option and the amount of coverage pursued, the investor can retain some ability to benefit from upward moves by the underlying instrument,” noted Global X’s Rohan Reddy.

Translation: There are sources of allure in writing covered calls, but for many investors, pursuing that endeavor across multiple stocks is burdensome in both time and capital. On the other hand, ETFs such as QYLD and XYLD do the heavy lifting for investors while providing market participants with a variety of other benefits.

Covered Call Perks

“Options can help lower a beta coefficient associated with a portfolio, reduce leverage, and support higher account cash balances in anticipation of future investments. Due to their low cost, options can also give investors room to take a wider variety of positions while maintaining a relatively defensive stance,” added Reddy.

Accessing those benefits doesn’t mean investors sacrifice income. Actually, the opposite is true. QYLD and XYLD both deliver monthly payouts and sport distribution yields of 11.67% and 10.88%, respectively. Those figures are well in excess of the dividend yields found on the Nasdaq-100 and the S&P 500 – the indexes the ETFs serve as covered call equivalents of.

As noted above, those big income stream come with the benefits of some durability, even the ability to thrive, during rocky market settings.

“his trait is supportive of income-generating strategies like covered call writing and cash covered put writing, where the premiums received from writing contracts can provide the immediate income that might be difficult to accrue from other asset classes,” concluded Reddy. “Broadly, adding these functions into portfolios during times of elevated volatility can help investors diversify their portfolios, potentially enhancing their total returns while reducing risk.”

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.