VettaFi’s vice chairman Tom Lydon discussed the Global X Russell 2000 Covered Call ETF (RYLD) on this week’s “ETF of the Week” podcast with Chuck Jaffe of “Money Life.”
RYLD provides investors access to the small-cap market. The fund offers exposure to the Russell 2000 index with a covered call strategy, also known as a buy-write, on top of it.
“This is not above its 200-day average. This is not currently a trend-following opportunity,” Lydon said. “Although we did see [upward movement] after COVID in the small-cap area, it did give most of it back. With that being said, a couple of things are very advantageous with this ETF.”
Lydon highlighted RYLD as an opportunity to capitalize on small-caps’ attractive valuations right now. The P/E ratio of the S&P 500 is around 20. Meanwhile, the P/E ratio of the Russell 2000 is just 11.
“If you think you can get small-cap stocks at half the price of the S&P 500 — it just doesn’t happen that often. Historically, over time, small-caps outperform large-caps,” Lydon said. “If you’ve got money on the sidelines… well, here’s an option to get in and buy good stocks inexpensively.”
RYLD Offers an Attractive Yield
Investors in RYLD also get paid while waiting for small-caps’ recovery rally, Lydon said. RYLD’s covered call options strategy has provided a nearly 14% yield in the past 12 months. Currently, the distribution yield is about 12%, he added.
While the attractive yield may seem too good to be true to some investors, Lydon said that this is not an ultra-high yield strategy where you’re buying very low-quality paper.
“It’s got everything to do with a covered call or buy-write strategy that’s all inherent with this ETF,” Lydon said. “In this case, the yield is real, and it’s very attractive.”
Lydon noted that the yields don’t correlate with interest rates. Therefore, if the Fed is finished with hiking rates and rates go down, it doesn’t necessarily mean that the yield investors are getting from this covered call ETF is going to decline.
“Eventually, mid-caps and small-caps will catch up. I would say most people don’t have an allocation to small-caps, or if they do, it’s very, very small,” Lydon said. “You should have diversification to small-caps. If you don’t, this is a great option. You’d have the proper allocation [due to] the diversified index, but you also have a yield kicker on top of that.”
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