iShares High Yield Corporate Bond BuyWrite Strategy ETF

HYGW

Market cap $230M

HYGW delivers 2x the yield of HYG but faces 2x the capital decay risk from the capped upside of its buy-write strategy. Its structure makes returns asymmetric: in downturns, the price falls more than the premium increases. So is it an ETF to discard? In my view, it can still play a role in an income-oriented portfolio.

HYGW implements a passive strategy of holding the iShares iBoxx High Yield Corporate Bond ETF and systematically selling one-month covered call options on 100% of its holdings. While HYGW exhibits lower volatility than HYG, it has consistently underperformed HYG in normalized economic environments and during shallow market drawdowns. HYGW demonstrates its value during significant market stress or "true credit events" (like the March 2023 regional banking crisis), where the option premiums received significantly buffer the downside.

Buy-write ETFs like LQDW and HYGW historically underperformed their underlying ETFs due to mechanical monthly covered Call strategies. LQDW and HYGW's make sense in very few scenarios, in most scenarios they either under-perform their underlying or incur losses. Investors should consider direct investments in LQD or HYG if they expect appreciation, or explore other high-income stocks and ETFs for better returns.

The iShares High Yield Corporate Bond Buywrite Strategy ETF writes covered calls on the HYG ETF to generate high distributions. The fund's strategy results in capped upside and uncapped downside, causing it to underperform the underlying HYG ETF over the long term. Given the monthly rolling of HYGW's covered calls and current low credit spreads, HYGW is likely to see capital losses as the economy weakens in the coming years.

HYGW offers a strong 13.3% distribution yield by investing in high-yield corporate bonds and writing covered calls. The fund's strategy works best when high-yield rates are flat or increasing, worst when these decrease. At current rates and spreads, I do not foresee any significant decrease in high-yield rates moving forward.

The U.S. ETF industry continues to evolve. In the first 10 months of 2023, fixed income ETFs gathered more than 40% share of the net inflows, despite representing just 20% share of the market.