Global X ETFs on Monday launched the Global X Russell 2000 Covered Call ETF (Cboe: RYLD), which 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 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.
“Small caps can have higher volatility, which typically leads to greater option premiums,” said Rohan Reddy, Research Analyst at Global X. “We are thrilled to be able to offer investors the opportunity to utilize a covered call strategy on the premier small cap benchmark index, the Russell 2000. We believe RYLD is a great complement to our other covered call offerings, as investors continue to look for alternative sources of income.”
Overview of RYLD’s strategy:
- RYLD sells Russell 2000 Index options (RTY) to a counterparty that will expire in one month
- A premium is received in exchange for the sale of the index options
- At the end of the month, RYLD seeks to distribute a portion of the income from writing/selling the RTY index option to the ETF shareholders
- At the beginning of each new month this process is repeated
RYLD is the third ETF in Global X’s Covered Call suite of ETFs, joining the Global X Nasdaq 100 Covered Call ETF (NasdaqGM: QYLD) and the Global X S&P 500 Covered Call ETF (NYSEArca: HSPX). The suite now totals over $500 million in AUM as of April 16, 2019.
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