Global X S&P 500 Covered Call Complex ETF (ASX: UYLD)

The Global X S&P 500 Covered Call ETF (UYLD) offers an innovative income solution by combining a core exposure to the S&P 500 with a disciplined "buy-write" strategy. By holding the fifty leading blue-chip stocks and selling corresponding monthly call options, the fund generates immediate premium income, providing a higher yield alternative to traditional US dividend-paying equities. This approach is particularly effective during volatile or sideways-trading markets, as option premiums often rise alongside market uncertainty and interest rates, acting as a natural hedge against drawdowns.

While the strategy caps potential upside during sharp bull market rallies, it allows investors to participate in the performance of the world’s premier share market gauge while receiving consistent cash flow. Tracking the Cboe S&P 500 BuyWrite Index, UYLD provides a fully replicated, rules-based portfolio designed to enhance risk-adjusted returns through a sophisticated diversification of income sources.

The Global X S&P 500 Covered Call ETF (UYLD) follows a “covered call” or “buy-write” strategy, in which the fund buys the stocks in the S&P 500 Index and “writes” or “sells” corresponding call options on the same index to generate income. UYLD seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the Cboe S&P 500 BuyWrite Index.

UYLD seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the Cboe S&P 500 BuyWrite Index. The Cboe S&P 500 BuyWrite Index measures the total return of a hypothetical “covered call” strategy applied to the S&P 500 Composite Price Index (the “S&P 500® Index”). The “long” S&P 500 Index component and the “short” Covered Call Option component are held in equal notional amounts.

• Covered call strategies are a well-known method for generating yield.
• When markets are volatile, options premiums tend to rise, generating higher income for options sellers.
• Call option premiums rise when interest rates rise.
• Call option premiums tend to be higher for low dividend stocks, creating a natural hedge

Covered call writing is an investment strategy where investors buy a stock, or group of stocks, and sell call options on them. Selling call options on stocks investors already own generates income, without facing riskier margin calls. However, it requires investors to forego upside – as a covered call portfolio can be “called away” when markets move higher.

Key covered call features:

• Generates income from selling call options on assets already owned.
• Investors are “covered” from a margin call perspective.
• Upside potential is capped, while drawdowns are mitigated by the premiums received from selling calls.
• Typically generates higher income during volatile markets or periods of high interest rates, as call option premiums usually rise with volatility and rates.
• Can outperform during sideways-trading or falling markets, as income generated from selling calls can mitigate drawdowns. 

The S&P 500 is a familiar index to many Australians. The leading US share market gauge, it plays home to some of the world’s largest companies. Despite being one of the best performing share markets in the world, many Australians have preferred to invest locally in Australian shares, as US shares typically pay lower dividend yields. The lower yield owes to the fact that many US companies choose to reward shareholders through buybacks.

In this setting, covered call strategies provide something of a solution, and provide a way to invest in the S&P 500 while also generating higher yield.

There are many income solutions available to Australian investors, such as buying high yield bonds or dividend paying stocks. But covered calls are different in that their income is hedged against rising volatility and interest rates. All else being equal, when volatility rises, option premiums rise as options traders price higher probabilities of sharp share price movements into calls. When interest rates rise, call option premiums mechanically rise too, as call sellers provide, in effect, a loan to buyers. The economics of which gets priced into premiums1. Furthermore, options premiums tend to be inversely correlated to dividend yields—with lower dividend yielding stocks producing higher premiums – creating a natural hedge.

All investments come with risks – and covered calls are no exception. Chief among the risks is that in bull markets, when share prices rise sharply, option sellers get called away. This means that portfolios running covered call strategies do not fully participate in rallies and can under perform during bull markets. 

Before investing, investors should ensure they understand covered call option writing risk. By writing covered call options in return for the receipt of premiums, UYLD will give up the opportunity to benefit from potential increases in the value of the S&P 500 Index above the exercise prices of such options but will continue to bear the risk of declines in the value of the S&P 500 Index.

The premiums received from the options may not be sufficient to offset any losses sustained from the volatility of the underlying stocks over time. As a result, the risks associated with writing covered call options may be similar to the risks associated with writing put options. In addition, UYLD’s ability to sell the securities underlying the options will be limited while the options are in effect unless UYLD cancels out the option positions through the purchase of offsetting identical options prior to the expiration of the written options. Exchanges may suspend the trading of options in volatile markets. If trading is suspended, UYLD may be unable to write options at times that may be desirable or advantageous to do so, which may increase the risk of tracking error. 

• UYLD tracks the S&P 500 BuyWrite Index.
• The fund invests in the S&P 500 Index on a fully replicated basis.
• It then sells a succession of one-month at-the-money – or nearest out-of-the-money – exchange traded call options on the same index worth roughly 100% of the value of the portfolio.
• Options are held until maturity. A new-at-the-money call option expiring in the next month is then deemed written or sold.

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The issuer of units in Global X S&P 500 Covered Call ETF (UYLD) ARSN: 661 598 116 is the responsible entity of the Fund, being Global X Management (AUS) Limited (AFSL 466778) (“Global X”). The product disclosure statement (PDS) for the Fund contains all of the details of the offer of units in the Fund. Copies of the PDS are available from Global X Management (AUS) Limited or at www.globalxetfs.com.au. In respect of each retail product, Global X has prepared a target market determination (TMD) which describes the type of customers who the relevant retail product is likely to be appropriate for. The TMD specifies distribution conditions and restrictions that will help ensure the relevant product is likely to reach customers in the target market. Each TMD is available at www.globalxetfs.com.au. The information provided in this document is general in nature only and does not take into account your personal objectives, financial situations or needs. Before acting on any information in this document, you should consider the appropriateness of the information having regard to your objectives, financial situation or needs and consider seeking independent financial, legal, tax and other relevant advice having regard to your particular circumstances. Any investment decision should only be made after obtaining and considering the relevant PDS and TMD. Investments in any product issued by Global X are subject to investment risk, including possible delays in repayment and loss of income and principal invested. None of Global X, the group of companies which Mirae Asset Global Investments Co., Ltd is the parent, or their respective directors, employees or agents guarantees the performance of any products issued by Global X or the repayment of capital or any particular rate of return therefrom. The value or return of an investment will fluctuate and an investor may lose some or all of their investment. Past performance is not a reliable indicator of future performance. Standard & Poor’s® and S&P® are registered trademarks of Standard & Poor’s (“S&P”), a division of the McGraw Hill Companies, Inc.  “S&P”, has licensed the use of its trademarks and service marks by Global X.  Global X funds are not sponsored, endorsed, sold or promoted by S&P, and S&P does not make any representation regarding the advisability of investing in Global X funds.

Information current as at 25 January 2023