Exchange-traded fund (ETF) issuers are getting more creative than ever. These days, there’s an ETF for just about every goal or risk tolerance, making it easier for investors to find something that fits their needs.
If you’re an income investor with a higher risk tolerance, I’ve got two ETFs from Global X that might catch your attention. The quick summary? They take two of the most well-known indexes – the S&P 500 and Nasdaq 100 – apply 1.25 times leverage to them, and then sell covered calls.
The result? Double-digit yields paired with the potential for decent share price appreciation. Here’s what you need to know about these innovative ETFs.
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Global X Enhanced S&P 500 Covered Call ETF
The Global X Enhanced S&P 500 Covered Call ETF (TSX: USCL) is actually fairly straightforward to understand.
For every $100 you invest in this ETF, Global X uses it to invest in one of their funds that sells covered call options on the S&P 500 Index. This strategy limits some of the upside potential in share price returns in exchange for higher income through option premiums.
To offset the capped upside, Global X borrows an additional $25 for every $100 invested, effectively applying 1.25 times leverage. This approach increases both risk and yield, similar to what you’d achieve using a margin loan yourself.
However, Global X secures better borrowing rates as an institution, and as interest rates eventually fall, this strategy could face fewer headwinds.
The result? You get exposure to the S&P 500, but instead of relying solely on upward share price appreciation, the combination of modest leverage and covered call premiums delivers an 11.8% annualized yield, with monthly payouts.
Global X Enhanced NASDAQ-100 Covered Call ETF
One interesting aspect of the covered call strategy is that, all else being equal, the more volatile the assets the calls are written on, the higher the option premiums – and, by extension, the income generated.
This explains why the Global X Enhanced NASDAQ-100 Covered Call ETF (TSX: QQCL) offers an annualized yield of 12.4%, surpassing USCL.
The reason lies in QQCL’s underlying assets: the Nasdaq-100 stocks, which include mega-cap tech giants like the Magnificent Seven. These stocks tend to be far more volatile than the S&P 500, resulting in higher options premiums and greater income potential.
Functionally, QQCL operates the same way as USCL. It applies 1.25 times leverage by borrowing an additional 25% to invest in another Global X fund that sells covered calls on the Nasdaq-100.
