In this article, we discuss 5 derivative income ETFs to invest in. If you want our detailed analysis of these investment opportunities as well as five other ETFs to consider, check out 10 Derivative Income ETFs to Invest In.
5. Global X Russell 2000 Covered Call ETF (BATS:RYLD)
Global X Russell 2000 Covered Call ETF (BATS:RYLD) is an exchange traded fund that uses covered call writing, which produces higher yields during market volatility. Global X Russell 2000 Covered Call ETF (BATS:RYLD) writes call options on the Russell 2000 Index, and makes distributions to investors on a monthly basis. Global X Russell 2000 Covered Call ETF (BATS:RYLD) seeks to replicate the performance of the Cboe Russell 2000 BuyWrite Index, offering a distribution yield of 13.05% as of February 25.
Global X Russell 2000 Covered Call ETF (BATS:RYLD) primarily invests in the VANGUARD RUSSELL 2000 ETF, which has a portfolio of diversified stocks of small-cap U.S. companies. A significant underlying stock is Ovintiv Inc. (NYSE:OVV), a Colorado-based company that develops and markets natural gas, oil, and natural gas liquids.
Ovintiv Inc. (NYSE:OVV) declared on November 2 a $0.14 per share quarterly dividend, in line with previous, which was paid on December 31. Ovintiv Inc. (NYSE:OVV)’s dividend yield is 1.64% as of March 7.
According to the database of 924 elite hedge funds tracked by Insider Monkey that filed 13Fs for the December 2021 reporting period, 44 funds reported owning stakes worth over $1 billion in Ovintiv Inc. (NYSE:OVV). Marshall Wace LLP is the largest shareholder of the company among them, with approximately 4 million shares worth $132.75 million.
Here is what Miller Value Partners Opportunity Equity had to say about Ovintiv Inc. (NYSE:OVV) in its Q4 2021 investor letter:
“The outlook for high multiple favorites depends to a great degree on interest rates. Warren Buffett likened interest rates to the force of gravity for asset prices. At current low levels, high valuations on long-duration assets can be justified. If interest rates move up, the adjustment will be painful. Market action early in the new year, with the swift moves up in interest rates and down in the Nasdaq, offers a taste of the medicine.
We underwrite all our names to have sufficient upside even if risk-free rates move up to 3% (a scenario, not a forecast!). As we evaluate the opportunity set, we find more attractive prospects in the classic value names. We often hear that people think value investing is dead, which only strengthens our conviction. Our gross exposure to classic value has risen from 44% a year ago to 62% currently.
One new name that illustrates the potential we see is Ovintiv (OVV), an oil and gas producer. We’ve seen a huge shift in the industry away from growth towards returns on capital, cash generation, and capacity discipline. OVV exemplifies the change.
OVV’s new CEO Brendan McCracken says: “We are at the forefront of driving innovation to produce oil and gas from shale both profitably and sustainably. We will generate superior returns and free cash flow by continuously improving capital efficiency and expanding margins while driving down emissions. We will deliver that value to our shareholders through disciplined capital allocation.”
Based on crude at $65 (well below the current $83.82 as of 1/14/22), the company guides to free cash flow generation of $11B over the next 5 years and $21B in the next 10 years. The company’s market cap is currently $10B and its enterprise value is $16B. It’s returning a significant portion of the capital to shareholders. If crude averages $70 in 2022, the company will return $700M to shareholders (in addition to paying down a significant amount of debt), which implies a yield of 7% at the current $39.53 price. In other words, there’s a good shot the company will return nearly its entire market cap to shareholders over the next 5 years.”
