Global X Russell 2000 Covered Call ETF

RYLD

Market cap $1.28B

RYLD offers high monthly income by writing covered calls on the Russell 2000, yielding 12.7% with a low 0.60% fee. The strategy caps upside potential but smooths volatility, making it relatively attractive during flat or declining markets. Distribution amounts can be volatile and are mostly return of capital, which reduces the cost basis and can potentially increase the tax implications for investors.

The Global X Russell 2000 Covered Call ETF offers exposure to small-cap US stocks via full replication of the Russell 2000 for capital appreciation potential. The ETF generates a conservative ~12% yield today primarily from selling at-the-money call options, providing steady income but capping upside in sharp rallies. Covered call strategies like RYLD perform best in flat or slowly rising markets, offering a limited downside cushion through option premiums.

Since my last writings, the implied volatilities (IV) for both the NASDAQ and Russell indices have risen to quite extreme levels. This offers favorable pricing for both RYLD and QYLD's use of options. The current IV is even more extreme for QYLD's underlying index, judging by historical records.

This article upgrades my rating on RYLD to buy primarily for two considerations. First, its 12%+ dividend yield is near peak levels since its inception, indicating unusually favorable risk premium. The current yield is nearly 2x of its historical average of 6.3%.

Global X Russell 2000 Covered Call ETF offers a high dividend yield of 11.8% through a covered call strategy, ideal for income generation. RYLD's price has declined by over 33% since inception, but high distributions have boosted total returns by 31%, despite the current high-interest rate environment. The fund's ATM option strategy caps upside potential, making it suitable for choppy or declining markets, with a focus on income rather than growth.

Closed-end funds are special income vehicles, with many positive aspects and just as many weaknesses that take time to be properly understood and evaluated. I discovered their existence about ten years ago, and over time, I became convinced of their worth by developing a personal method of selection based mainly on NAV performance. This is an analytical, data-driven approach which I then extended to other types of securities in my portfolio, namely ETFs and BDCs.

RYLD tracks the Russell 2000 while systematically selling monthly at-the-money covered calls on the index. The Russell 2000 is not a great fit for this strategy due to its tendency to reap gains through sudden, large increases in value rather than gradual growth. Hence, RYLD has suffered severe NAV erosion with the fund down over 30% despite a 55% in the underlying.

RYLD employs a covered call strategy on the Russell 2000, offering high monthly income but capping upside potential, making it attractive for income-focused investors. Since inception, RYLD has underperformed the Russell 2000 Index, delivering a 23% ROI versus the index's 52%, mainly due to its strategy's limitations. The fund's high distribution yield of over 12% is attractive, but investors should consider total return, as much of the yield is return of capital.

Small cap companies have underperformed their large-cap peers in the past few years as most of them have struggled in a high-interest-rate environment. For example, the S&P 500 index and the Nasdaq 100 have had total returns of over 72% in the last five years, while the Russell 2000 index has returned 57.

My portfolio includes CEFs, ETFs, a few BDCs and an ETN, for whose selection I have developed over the years a criterion based mainly on NAV performance. In this article, however, I decided to focus on the price of each security in my portfolio, comparing it with the lows and highs touched throughout its history. An overview of the path each one has taken from launch to current market quotation with a personal assessment of the possible room for maneuver from those values.