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Buy-Write ETFs to Consider in a Shaky Market

Wall Street is currently on a roller coaster ride due to uncertainty over the debt ceiling deal. Another round of deal talks between representatives of U.S. President Joe Biden and congressional Republicans to raise the government's $31.4 trillion borrowing limit ended with no progress.

Republicans, led by Mr. McCarthy, are demanding more than $4 trillion in spending cuts in return for raising the ceiling. Democrats have refused and instead are offering to keep spending flat. The U.S. government is nearing the Jun 1 deadline, when it could run out of cash to pay its bills and could not borrow any more money. A failure to lift the debt ceiling would threaten to wreak havoc on the global economy, affecting prices and mortgage rates in other countries. It could also trigger a spike in interest rates besides spurring a default, analysts have cautioned (read: How Markets and ETFs Are Bracing for Debt Ceiling Crisis).

Against this backdrop, investors are looking for investments that provide capital appreciation opportunities in the equity world with simultaneous downside protection. A gainful option for now could be the ‘Buy-Write’ strategy, which provides consistent income from the premiums received from writing call options.

Buy-Write Strategy in Focus

A buy-write, also known as a covered call strategy, is an investment strategy used to generate income and potentially hedge against downside risk. It involves buying a stock or a basket of stocks and then selling or writing call options on those same assets.

With this process, the portfolio aims to generate additional monthly income from the call option (premiums collected). The income from option premiums can help to offset losses from the underlying stocks, which can potentially result in lower portfolio volatility. This means that buy-write strategies might experience smaller price swings compared to a pure equity investment.

If the product stays flat or declines slightly, investors keep the premium and their stock. However, if prices rise, investors only receive the premium and stocks are sold at the price that was agreed upon on the covered call. As such, the strategy outperforms in a neutral to bear markets while underperforms in bull markets in the short term.

Investors seeking to make a play on the stock market using this strategy could consider the following ETFs (see: all the Large Cap ETFs here):

Global X Nasdaq 100 Covered Call ETF (QYLD)

Global X Nasdaq 100 Covered Call ETF follows the Cboe Nasdaq-100 BuyWrite V2 Index, which is designed to buy the stocks in the Nasdaq 100 Index and “writes” or “sells” corresponding call options on the same index. Global X Nasdaq 100 Covered Call ETF has $7.4 billion in AUM and trades in a solid volume of 3.4 million shares a day on average. It charges 60 bps in annual fees from investors.

Amplify CWP Enhanced Dividend Income ETF (DIVO)

Amplify CWP Enhanced Dividend Income ETF is an actively managed ETF of high-quality large-cap companies with a history of dividend growth, along with a tactical covered call* strategy on individual stocks. It has accumulated $2.9 billion in its asset base and charges 55 bps in fees per year. Amplify CWP Enhanced Dividend Income ETF trades in good volume of 399,000 shares.

Global X S&P 500 Covered Call ETF (XYLD)

Global X S&P 500 Covered Call ETF buys the stocks in the S&P 500 Index and “writes” or “sells” corresponding call options on the same index. It tracks the Cboe S&P 500 BuyWrite Index, charging 60 bps in fees per year. Global X S&P 500 Covered Call ETF has amassed $2.7 billion in its asset base and trades in a good volume of 560,000 shares.

Global X Russell 2000 Covered Call ETF (RYLD)

Global X Russell 2000 Covered Call ETF buys the stocks in the Russell 2000 Index (at times by exposure to the Vanguard Russell 2000 ETF), and “writes” or “sells” corresponding call options on the Russell 2000 Index. It follows the Cboe Russell 2000 BuyWrite Index and charges 60 bps in fees per year. Global X Russell 2000 Covered Call ETF has AUM of $1.4 billion and trades in an average daily volume of 1.4 million shares (read: ETFs to Hedge Volatility Amid Debt Default Worries).

Aptus Collared Investment Opportunity ETF (ACIO)

Aptus Collared Investment Opportunity ETF invests in 50 large-cap stocks and pursues additional income by selling coverall calls on those stocks. ACIO has an added goal of minimizing the downside using long put options on a broad-based market index. It charges 79 bps in annual fees and trades in a lower volume of 53,000 shares per day on average. Aptus Collared Investment Opportunity ETF has AUM of $578.6 million.

Bottom Line

Investors should note that the buy-write strategy leads to premium income and some level of downside protection provided by the premium. However, the trade-off is that the strategy caps investors’ upside potential: if the stock's price surges, they will not benefit from the gains above the strike price.

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Global X Nasdaq 100 Covered Call ETF (QYLD): ETF Research Reports

Amplify CWP Enhanced Dividend Income ETF (DIVO): ETF Research Reports

Global X Russell 2000 Covered Call ETF (RYLD): ETF Research Reports

Aptus Collared Investment Opportunity ETF (ACIO): ETF Research Reports

Global X S&P 500 Covered Call ETF (XYLD): ETF Research Reports

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