Friday, January 7, 2022

Comparison of Certain ETFs That Use Covered Calls

Certain ETFs used covered calls to generate extra income, which are returned to shareholders as dividends. With most of these ETFs, income is the priority; capital gains are secondary. One example of this type of ETF is QYLD, Nasdaq 100 Covered Call ETF. Some, such as QYLG and XYLG, only sell calls on about 50 percent of their holdings in order to increase the possibility of gains. One EFT, NUSI, also write puts, as a hedge against a bear market. (Note: The possibility of gains also increases the risk of losses, so judge accordingly.)

If you're looking for income, you should consider one or more of these ETFs. Note that QQQ and SPY, which as pure equity plays, had great returns, but the markets were up last year. This would be different in a down year. Also note that these covered call ETFs are new enough that they have not been tested during a bear market. 

Consider that the volume on some ETFs, such as XYLG, has a daily average volume of less than 10,000 shares. This will cause the spread (difference between asking price and selling price) to be higher than other ETFs with higher volumes. 

Another difference between these types of ETFs and a regular ETF is how taxes are treated (and why they may be more appropriate for tax-deferred or tax free accounts). Because options are considered 1256 contracts by the IRS, taxes are different. You can get more details by either going to the ETF's web site, or watch this video as an introduction to ETF taxes:  QYLD AND TAXES: A Comprehensive Review of QYLD, XYLD, RYLD. Here's another that discusses how distributions are paid and taxed:  QYLD Taxes: What You May be Missing

Symbol

Price 1/4

Price 12/31

Shares

Cap Gain

Dividends

Total Gain

% Gain

NUSI

27.54

27.92

3,647

$1,823

$7,907

$9,730

9.7%

QYLD

22.69

22.19

4,407

-$2,201

$12,565

$10,361

10.3%

XYLD

46.40

50.54

2,155

$8,922

$9,881

$18,803

18.8%

QYLG

29.44

31.87

3,397

$8,254

$10,995

$19,249

19.2%

RYLD

22.37

24.41

4,470

$9,119

$13,475

$22,594

22.6%

JEPI

55.14

63.19

1,813

$14,599

$8,011

$22,609

22.6%

XYLG

27.22

31.61

3,674

$16,127

$8,570

$24,698

24.7%

QQQ

309.31

397.84

323

$28,625

$548

$29,173

29.2%

SPY

368.79

476.37

271

$29,114

$1,535

$30,649

30.6%

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