Global X Launches Income Enhanced US Small Cap ETF | ETF strategy
Overall X expanded its range of covered call strategies with the launch of a new fund based on US small caps Russell 2000.
The ETF Global X Russell 2000 Covered Call & Growth (RYLG US) was listed on NYSE Arca with a fee rate of 0.60%.
The fund is linked to Cboe Russell 2000 Half BuyWrite Index which consists of a long position on the Russell 2000 combined with a systematic overlay of covered call options.
A covered call is an options strategy in which an investor holds a long position in an asset and writes or “sells” call options on that same asset with the aim of generating more income (the additional income option premium) than the asset would otherwise provide. by itself from dividends or other distributions.
Historically, during bear markets, range bound markets and modest bull markets, covered call strategies have generally outperformed their underlying securities. However, during strong bull markets, when the underlying securities may frequently rise through their strike prices, covered call strategies have always tended to lag.
In terms of the new ETF’s strategy, the fund sells one-month at-the-money call options on the Russell 2000 equal to 50% of the value of the fund’s portfolio. The strategy therefore aims to provide regular income while allowing investors to capture half of the upside potential of the underlying index.
This approach differentiates the fund from the existing ETF Global X Russell 2000 Covered Call (US RYLD) who systematically sells call options on 100% of the value of the portfolio. RYLD houses $1.3 billion in assets and also has an expense ratio of 0.60%.
Beyond these two Russell 2000-based funds, Global X also offers five other ETFs in its covered call series, including funds based on the S&P500, Nasdaq 100and Dow Jones Industrial Average. Collectively, the suite houses $9.7 billion in assets under management.
According to Global X, covered call strategies can appeal to yield-seeking investors who want to avoid the duration risk posed by traditional fixed-income asset classes in a rapidly rising interest rate environment.
Rohan Reddy, Director of Research at Global X ETFs, said: “As investors assess the impact of continued central bank rate hikes and stubborn inflation, hedged buy and growth strategies can be a efficient way to navigate choppy and sideways markets. This fund draws on the expertise of Global X to offer covered call options on Russell 2000 of small cap stocks, helping to diversify income portfolios away from traditional sources in an uncertain environment while allowing investors to capture upside potential.