Active Exchange Traded Funds (ETFs) are booming, with companies like JPMorgan, Goldman Sachs, and Global X fighting to gain market share in the industry.
Data shows that these active funds, which often have a higher expense ratio than their passive peers, have taken over 70% of management fee income this year. They have also captured substantial assets of the $600 billion moving to ETFs this year.
QYLD, XYLD, and SPYI are high-dividend funds
JPMorgan’s JEPI and JEPQ have become the biggest players in the industry. This article will look at the Global X NASDAQ 100 Covered Call ETF (QYLD), Global X S&P 500 Covered Call ETF (XYLD), and Neos S&P 500 High Income ETF (SPYI).
These are all large funds that have become popular among dividend investors because of their substantial returns.
The SPYI has accumulated over $2.2 billion in assets and has a dividend yield of 11.53%. Similarly, the XYLD fund has $2.82 billion in assets and a 9.23% yield, while the QYLD has $8.17 billion and an 11.4% yield.
These are all significantly higher yields than what most investments offer today, even as US bond yields continue rising.
Data shows that the 10-year yield has risen in the past four consecutive weeks, reaching a high of 4.20%, its highest point since July. Similarly, the 30-year and five-year rose to 4.50% and 4%, respectively.
Therefore, in this case, assuming that everything was frozen for now, it means that a $100,000 investment in the five-year government bonds will bring in $4,500 a year. The same amount invested in the SPYI ETF, excluding the stock return, will have a gross return of over $11,000.
This performance explains why these boomer candy ETFs have become highly popular among dividend investors.
Read more: JEPI, JEPQ, and JPIE ETF scorecard for 2024 so far
How the XYLD, QYLD, and SPYI ETFs work
These ETFs aim to generate returns by doing two things: investing in assets and then selling their call options.
A call option is a financial transaction that gives investors a right but not the obligation to buy an asset at a certain price, often known as the strike price, and within a certain period. For this right, the buyer pays a premium to the option writer.
The XYLD ETF is a fund that first invests in the Cboe S&P 500 BuyWrite index, which is made up of companies like Apple, Microsoft, NVIDIA, and Tesla. It then has a short call options on up to 100% of the S&P 500 index, which gives it the premium it uses to distribute the funds to investors.
The premium is an important part of the covered call ETF because it offsets the losses made if the underlying index declines.
The Neos S&P 500 High Income ETF is similar to the XYLD in that it invests in a portfolio of companies that make up the S&P 500 index. It then places written or sold call options on the S&P 500 index.
In this case, the fund aims to make returns by cashing out the premium earned when it places the call option. Also, it makes money from the dividend it earns from equity investments.
The QYLD ETF is similar to the XYLD, with the only difference being the fact that it tracks the Nasdaq 100 index, which is made up of the biggest tech names in the US.
Are they good investments?
The main benefit of investing in these ETFs is that it gives you a high monthly return. This is different from other funds that pay their funds quarterly or annually. As such, it can be a good way to generate returns, while still benefiting from the indices upside.
Most importantly, the funds are good alternatives to bond investors since yields could still come down as the Fed continues to cut rates.
However, for an investor seeking long-term growth, the three funds are not the most ideal investments. For one, they are more expensive than many popular passive funds. QYLD and XYLD have an expense ratio of 0.61%, while SPYI has a ratio of 0.68%.
In contrast, many popular ETFs like the Vanguard S&P 500 ETF has an expense ratio of just 0.03%. While the spread is not all that big, the amount of money could add up over time.
These high fees would be worth it if the funds were generating higher returns than the passive funds. However, historical data shows that ETFs like QQQ, SPY, and VOO do better than these actively managed funds.
A good example of this is in the chart above. As seen, QQQ, which tracks the Nasdaq 100 index and S&P 500’s VOO, have had total returns of 164% and 110% in the last five years. In the same period, QYLD, XYLD, and SPY have returned less than 50%.
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