XYLD has a 10.8% yield: But is it a good S&P 500 ETF to buy?

The Global X S&P 500 Covered Call ETF (XYLD) ETF has bounced back in the past few weeks as American equities have rallied. The XYLD stock jumped to a high of $39.18, its highest point since September 20th. It has jumped by over 5.18% from its lowest point on October 27th and by over 19% from its 2022 lows.

Is the 10.8% yield enough?

Income investors have more choices on where to park their money as the number of high-yield ETFs has risen. Some of the most popular high-yield ETFs in the industry are JEPI, JEPQ, QYLD, and JPIE.

The XYLD is another fund that has grown more popular among investors as the total assets have jumped to over $2.8 billion. It has also seen strong inflows in 2023 as income-focused investors looked for yields.

The XYLD ETF works in a relatively simple approach that tracks the CBOE S&P 500 BuyWrite Index. In this case, it invests in all stocks in the S&P 500, one of the biggest indices in the world.

The fund then writes call options on up to 100% of the S&P 500 and then receives the premium. Therefore, if the S&P 500 index drops during the period, the call option becomes worthless and the fund remains with that premium, which it provides through distributions.

On the other hand, if the S&P 500 index rises, the fund makes money through both the premium and the stock appreciation. The risk in this case is when the index moves above the options price since the fund will lose the upside. 

The other scenario is where the S&P 500 remains in a narrow range. In this case, also, the fund will be in the money through the premium payment. Therefore, the XYLD ETF is seen as a good way to both generate income while also betting on the upside of American equities.

Is XYLD ETF a good investment?

Some analysts believe that covered call options are an ideal way of making money in the stock market. In the case of XYLD, they cheer its huge dividends, monthly distributions, and its overall positive track record over time.

The challenge for XYLD is that it underperforms the generic S&P 500 index ETFs like the SPDR S&P 500 (SPY), iShares Core S&P 500 (IVV), and the Vanguard S&P 500 (VOO). For example, a $10,000 invested in the SPY ETF on January 1st, 2018 would now be worth over $18,900. 

A similar amount invested in the XYLD ETF on the same day would now be worth over $12,677. As shown below, the total return of the SPY ETF is much better than that of the XYLD fund.

SPY ETF vs XYLD

Keep in mind that XYLD is a highly expensive fund to own with an expense ratio of 0.60% compared to SPY’s 0.03%. And most importantly, there is a question on whether you need a monthly dividend payment after all. Many people do well with quarterly and even annual dividend payouts.