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An ETF for Covered Calls on Small Caps

·2 min read

As long as the U.S. economy is going to grow, we should have some exposure to the Russell 2000 where its components are heavily weighted to the domestic economy, suggests Bryan Perry, growth and income expert and editor of Cash Machine.

What I see delivering annual yields above 10% is a strategy of using well-executed covered calls. At present, I find this method of producing monthly income to be highly attractive.

More from Bryan Perry: TriplePoint Aims for Growth in Venture Capital

From the standpoint of income vehicles, the covered-call structure, when managed properly, is an excellent source of monthly payments and the management teams at Global X have proven they are adroit at plying their trade. I’m a huge fan of covered-call income.

It is my view that the Russell 2000 Index will finally break out of its seven-month base and play some serious catch-up with the Dow, S&P 500 and the Nasdaq.

The market has been camped out in the mega-caps, awaiting the all-clear sign that the economy can stand on its own, post- COVID and post-QE. If so, the small-cap stocks will take off, and the data are beginning to support this base case.

When money starts moving from the ultra-safety of big-cap stocks to a more risk-on profile that small- cap stocks embrace, then the payoff will be in the form of stock appreciation, rising call options and premium-based monthly dividends.

This is where the Global X Russell 2000 Covered Call ETF (RYLD) makes good investment sense and a timely trade, setting up for a year- end rally in the one major index that has lagged.

The managers of the RYLD ETF make it very simple. The fund’s assets of $350 million are invested 100% in the Vanguard Russell 2000 ETF (VTWO) with a buy/write call option strategy that is paying out a current yield of 11.76%.

Dividends are paid monthly; through 2021 the monthly payouts have been steadily on the rise, mirroring higher volatility for the Russell 2000.

See also: Get First Dibs on this Retail Idea

What makes RYLD so special is that it’s a high-yield wager on the U.S. economy coming back to full health in the form of an index strategy that doesn’t require leverage to produce the kind of yield that income investors crave.

In a market where stock valuations are consistently rising and volatility is expanding, this is a formula that takes advantage of both features, delivers real results and makes for a fine fit to our Extreme Income Portfolio.

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