RYLD ETF: 13% Yield Pads Account With Income Outpacing Inflation

This has been one tough market to invest in, as even the strongest earnings reports fell victim to the correction. Investing sure doesn’t feel like investing, as everyone is trying to become an economist and factor in every piece of data that hits the wire. With access to information being at the forefront of many investment decisions, investors continue to hand on every word from the FOMC minutes or decipher how many of the economic indicators will impact tomorrow’s pricing, from nonfarm payroll numbers to inflation. If surging commodity prices impacting inputs costs on the production & manufacturing while increasing the costs of heating homes and filling up gas tanks wasn’t enough, Russia invaded Ukraine to top everything off. The markets hate uncertainty, and with inflation at the highest levels in decades, yield-starved investors don’t have many options. Therefore I continue to invest in the Global X Russell 2000 Covered Call ETF (RYLD) as one of my high-yield investments.

Since the November highs, S&P index funds, total market funds, and Nasdaq funds have all declined. The SPDR S&P 500 Trust ETF (SPY) has declined by 7.03%, while the Vanguard Total Stock Market ETF (VTI) declined by 8.79%, and the Invesco QQQ ETF (QQQ) declined by 14.84%. Over this period, RYLD has been in the middle as it declined by 10.38%. Looking at the data from 2022 as a stand-alone year, RYLD has declined the least of these funds, having decreased by 5.67%, while SPY is down 8.46%, VTI by 9.02%, and QQQ by 14.20%. It was a disappointing end to 2021, and 2022 hasn’t been much better, but income investors have been able to rely on RYLD to pad their accounts with continuous monthly cash flow. In November of 2021, RYLD paid a $0.25 distribution per share, then $0.31 in December 2021, $0.22 in January 2022, and $0.23 in February 2022. RYLD started the year trading at $24.52 and has already generated $0.46 or 1.85%, and there are still 10 more distributions to come in 2022. RYLD may not be exciting for capital appreciation, but its strong yield is appealing for income investors.

Covered Call ETFs are becoming more popular as the large yields are grabbing income investors attention

In my last article which was published on 1/12/22, RYLD had $844.64 million in assets under management (AUM). Since then, RYLD’s AUM grew to $923.61 million as of 1/31/22 and is now over the $1 billion mark with $1.01 billion in AUM as I write this article. In less than a month and a half, RYLD’s AUM has increased by 19.58%, or $165.36 million. The Global X NASDAQ 100 Covered Call ETF (QYLD) is Global X’s largest Covered Call ETF, and that fund has seen its AUM increase from $3.81 billion on 8/3/21 to $6.41 billion just over half a year later. QYLD has seen an inflow of $2.6 billion, increasing by 68.24% since 8/3/21.

If you haven’t read one of my articles discussing QYLD or RYLD before, you’re probably asking yourself why these funds are becoming so popular? My opinion is that the covered call funds are gaining tremendous attention due to their double-digit yields. Many investors have never written an option whether it was selling cash covered puts or a covered call such as RYLD and QYLD. Options have a stigma of being risky, and it’s been ingrained into many investor’s minds not to engage in the options markets. Options can be extremely risky, but they can be a powerful tool to generate income when utilized in a specific methodology. I don’t buy naked options because they are very risky in my mind. There are only 2 types of options that I personally engage with outside of covered call funds. I sell cash-backed put options on companies I intend to invest in at a lower price, and I sell out of the money covered calls on long-term dividend stocks within my portfolio.

Selling covered calls fall within my risk profile. For instance, take a company such as Omega Healthcare Investors (OHI). I have owned this large yielding REIT for around 5-6 years now, reinvesting every dividend along the way. Over the years, I have written covered calls against my position with an expiration date roughly 6 months into the future. Here is why I love covered calls. I intend to hold OHI through thick and thin for many years to come. Since I own the underlying asset, I can sell the right to another investor to purchase my shares of OHI through a call contract. I usually go $5-$6 out of the money because I want the contracts to expire worthless. Hypothetically I was to sell a covered call at a $34 strike, and shares don’t exceed $34 on the expiration date, the call option will expire worthless, I will keep my shares and keep the premium I was paid. If shares exceed $34 and trade at $36, I am forced to sell my shares which are correlated to the contract for $34, missing out on the additional $2 of upside. When I sell covered calls, the risk is missing out on upside appreciation since I have probably already held the stock for years, and I have no intention of selling. I just use covered calls to juice up my income.

The Global X covered call ETFs have become a popular product because investors can buy a fund and have the fund managers generate large amounts of yields selling at the money call options without the investor having to do anything. RYLD follows a covered call or buy-write strategy against the Russell 2000 index. RYLD brings an at-the-money-covered call-writing strategy to the U.S. small-cap space. RYLD provides exposure to stocks within the Russell 2000 and simultaneously sells a call option on the Russell 2000 index to generate large amounts of income. RYLD collects the premium received from selling options and allows RYLD to become an income vehicle with yields that exceed many other funds. RYLD sells Russell 2000 Index options that expire at the end of the month and receive premiums for the right to buy their shares from the buyers. At the end of every month, RYLD distributes a portion of the income they generate to shareholders of RYLD through its dividend. Every month RYLD replicates the process to generate income and disburse the premiums as dividend income to shareholders.

RYLD is working for yield-starved investors in 2022

Annual inflation rates in America have skyrocketed and are more than triple any single year from 2012 to 2020. In 2021 inflation rose to 7%, and in 2022 it climbed to 7.5%. If you’re not interested in trading or selling off shares of an index or total market fund during periods of appreciation, how are you supposed to generate yields that can match or exceed 7.5%? There are only a handful of equities that can come close to matching the rate of inflation. Bonds are out of the question, and treasury bills are not even in the discussion. The most common asset classes investors look toward for large yields are REITs, MLPs, Closed-End Funds (CEFs), or high-yielding ETFs such as RYLD.

RYLD has performed better than many of the well-known index funds on a YTD basis. Not only did RYLD fair better, but its yields significantly more as SPY generates 1.34% yield, VTI generates 1.35%, and QQQ generates 0.5%. Investors aren’t flocking to SPY, VTI, or QQQ for income, their investment thesis is directed toward capital appreciation. There is more than one investment method, and people invest to achieve different outcomes. RYLD has consistently outpaced inflation with the income it generates. In 2021 inflation grew rapidly and reached 7%.

Throughout 2021 RYLD paid $3.01 per share in monthly distributions. If you had purchased 100 shares on 1/4/21 at $22.37 per share, you would have spent $2,237 and generated a 13.46% distribution yield off your invested capital throughout the year. RYLD’s distribution stayed above inflation the entire year, and shares one year later, on 1/4/22, we’re valued at $24.52. If you had taken the distributions as cash, your investment would have also increased by $215 or 8.77%. This is exactly why covered call funds such as RYLD have become popular. The covered call strategy generates large amounts of yield and has traded relatively sideways, excluding the COVID-crash.

I don’t have a crystal ball, and everyone is looking toward rate hikes to mitigate inflation continuing to rise. Even if inflation starts to taper off and let’s speculate and say that inflation gets to 3% by the end of the year. Do you really want to own bonds? Since the first monthly distribution was paid on 5/31/19, RYLD’s monthly distributions have been paid like clockwork. Today, RYLD has a 12-month trailing yield of 13.76% and a current distribution yield of 13.21%. For income investors who are looking for a vehicle that can outpace inflation, yield more yield than most high-yielding securities, and trade sideways, RYLD has been a fantastic investment.

For investors who like the idea of generating income but aren’t retired, RYLD is an interesting investment to utilize the powers of compounding with. Look at 2021, for example. That $2,237 figure that I used in the previous example, can you guess what the outcome would have been if you had reinvested the monthly distributions? By reinvesting the distributions, you would have reinvested $319.14 back into the investment instead of taking $301 in cash. This would increase the distribution yield on your original investment to 14.27% from 13.48%. Your share count would have increased by 13.02 shares which would now be generating an additional $39.19 in annual income based on the current distribution. You would have started 2022 with 113.02 shares and generated $25.23 instead of $22.32 for the January 2022 distribution. If you have time on your side, you can compound your way into a large stream of income with RYLD.

Conclusion

RYLD has proven that it can work in different market cycles, from bull markets to corrections and periods of extreme uncertainty. Some readers of my previous articles commented that we have never seen how the mechanics of RYLD work in a correction, since, in their eyes, the COVID-crash didn’t count. I think there will always be investors who doubt RYLD’s potential because they disagree with its premise. Many would classify the past several months as a correction or a bear market, and RYLD has done just fine. The monthly distribution is still intact, the annual distribution more than outpaces inflation, and the downside probably wasn’t as bad as what people would have expected. I really like the covered call ETFs from Global X, and I plan on adding to all 3 in 2022. The devil is in the details, and the numbers indicate that RYLD is a high-yielding ETF that can continuously deliver.