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.”
4. Invesco S&P 500 BuyWrite ETF (NYSE:PBP)
Invesco S&P 500 BuyWrite ETF (NYSE:PBP) tracks the performance of the CBOE S&P 500 BuyWrite Index. Invesco S&P 500 BuyWrite ETF (NYSE:PBP) invests at least 90% of its total assets in securities that comprise the CBOE S&P 500 BuyWrite Index and writes call options thereon. Investors are paid dividends from the underlying securities and the option premiums received are reinvested. The fund delivers a 0.69% distribution rate as of February 25.
Invesco S&P 500 BuyWrite ETF (NYSE:PBP) concentrates on large-cap value, blend, and growth stocks. A significant underlying holding of the exchange traded fund is UnitedHealth Group Incorporated (NYSE:UNH), a diversified healthcare company in the United States.
On February 16, UnitedHealth Group Incorporated (NYSE:UNH) declared a quarterly dividend of $1.45 per share, in line with previous. The dividend is payable on March 22, to shareholders of record on March 14.
Among the hedge funds monitored by Insider Monkey in Q4 2021, 96 were bullish on UnitedHealth Group Incorporated (NYSE:UNH), with combined stakes of $13.6 billion. Rajiv Jain’s GQG Partners is the largest stakeholder of the company among those 96 funds, with 3.85 million shares worth $1.93 billion.
Here is what Third Point Management had to say about UnitedHealth Group Incorporated (NYSE:UNH) in its Q3 2021 investor letter:
“UnitedHealth is one of the largest healthcare companies in the world and a market leader in both its insurance and healthcare services (Optum) businesses. We initiated our position during the 2020 Presidential election at a time of heightened political and regulatory uncertainty.
We believe under its new CEO, Andrew Witty, UnitedHealth can not only preserve its market dominance and sustain industry-leading growth rates across most of its key segments but also enter new healthcare services markets. Witty is known as a mission-driven CEO who clearly articulates his view that providing high-quality, affordable health care services is a social good. He receives consistently high marks from former colleagues, and we believe that his leadership approach will ballast and even strengthen UNH’s already impressive management and employee ranks. The insurance and services businesses are synergistic and complementary, which entrenches United’s critical role in care financing, access, and management. This dynamic gives us confidence in the durability of United’s market leadership…” (Click here to see the full text)
3. AdvisorShares STAR Global Buy-Write ETF (NYSE:VEGA)
AdvisorShares STAR Global Buy-Write ETF (NYSE:VEGA) is a low volatility global balanced portfolio that strategically allocates to the capital markets, writing covered call options against a part of its underlying securities, resulting in an option premium. This additional income, in addition to bond interest and equity dividends from the portfolio can hedge against downside risk.
A prominent holding of AdvisorShares STAR Global Buy-Write ETF (NYSE:VEGA) is SPDR S&P 500 ETF TRUST, which seeks to provide investment results that correspond to the price and yield performance of the S&P 500 Index. A significant underlying security of SPDR S&P 500 ETF TRUST is JPMorgan Chase & Co. (NYSE:JPM), a New York-based multinational investment bank and financial services holding company.
On December 14, JPMorgan Chase & Co. (NYSE:JPM) reported a $1.00 per share quarterly dividend, in line with previous. The dividend was paid on January 31. JPMorgan Chase & Co. (NYSE:JPM) shares deliver a dividend yield of 2.98% as of March 7.
Among the funds tracked by Insider Monkey, Fisher Asset Management held the largest stake in JPMorgan Chase & Co. (NYSE:JPM) as of the end of 2021, with 7.4 million shares worth $1.17 billion. Overall, 107 hedge funds were bullish on JPMorgan Chase & Co. (NYSE:JPM) in the fourth quarter of 2021.
Here is what Miller Value Partners Opportunity Equity had to say about JPMorgan Chase & Co. (NYSE:JPM) in its Q4 2021 investor letter:
“I remember writing about the attractiveness of JP Morgan (JPM) right before it lost about a third of its value in the third quarter of 2011 (which didn’t please some of my colleagues!). I believed JPM was a high-quality bank whose prospects were undervalued due to the overhang on the space. It made money every year through the financial crisis.
In the decade-plus since then, JPM has beaten the market nicely (+417% versus SPX +345%) despite significant headwinds for banks (S&P Financial Sector +286%) and value stocks. Low market expectations are a key ingredient to attractive long-term returns!
An earthquake after-shock metaphor helps to explain the situation. Earthquakes relieve tension in physical systems, but aftershocks are common. These aftershocks aren’t as serious as the original event because stresses have been relieved. The financial crisis alleviated tensions in the financial system as weaker players either perished or were shored up with capital. Lessons learned impacted behavior (lower risk-taking behavior and higher propensity for monetary authorities to intervene supportively), which reduced future risk.
Those realities didn’t matter in the short term, but they sure did in the long term.”
2. JPMorgan Equity Premium Income ETF (NYSE:JEPI)
The JPMorgan Equity Premium Income ETF (NYSE:JEPI) distributes monthly income and offers exposure to equity markets that is controlled for volatility. The fund is involved in fundamental equity investing and options strategies. JPMorgan Equity Premium Income ETF (NYSE:JEPI) offers a 12-month rolling yield of 6.99%, and holds $6.80 billion in total net assets as of February 25.
A top holding of the JPMorgan Equity Premium Income ETF (NYSE:JEPI) is DTE Energy Company (NYSE:DTE), which provides electricity to residential, commercial, and industrial customers in southeastern Michigan.
On February 3, DTE Energy Company (NYSE:DTE) declared a quarterly dividend of $0.885 per share, in line with previous. The dividend is payable on April 15, to shareholders of record on March 21.
Among the hedge funds tracked by Insider Monkey, 27 funds were long DTE Energy Company (NYSE:DTE) in Q4 2021, up from 22 funds in the prior quarter. Zimmer Partners owns a leading stake in DTE Energy Company (NYSE:DTE), with 1.13 million shares worth roughly $136 million.
1. Global X S&P 500 Covered Call ETF (NYSE:XYLD)
Global X S&P 500 Covered Call ETF (NYSE:XYLD) writes covered call options on the S&P 500 Index, and the ETF has made monthly distributions to shareholders for more than 8 years. As of February 25, the 12-month trailing yield for Global X S&P 500 Covered Call ETF (NYSE:XYLD) stood at 10.24%.
A notable underlying stock in Global X S&P 500 Covered Call ETF (NYSE:XYLD)’s portfolio is Johnson & Johnson (NYSE:JNJ), a company that manufactures and sells healthcare products worldwide.
Johnson & Johnson (NYSE:JNJ) is a dividend king, with 59 consecutive years of dividend growth. On January 4, Johnson & Johnson (NYSE:JNJ) declared a $1.06 per share quarterly dividend, in line with previous. The dividend is payable on March 8, to shareholders of record on February 22. The stock delivers a dividend yield of 2.50% as of March 7.
Among the hedge funds monitored by Insider Monkey in Q4 2021, 83 funds were bullish on Johnson & Johnson (NYSE:JNJ), holding stakes worth $7.3 billion. Fundsmith LLP was the largest stakeholder of Johnson & Johnson (NYSE:JNJ) among them, with 7.20 million shares valued at $1.16 billion.
Distillate Capital mentioned Johnson & Johnson (NYSE:JNJ) in its Q2 2021 investor letter. Here is what the firm had to say:
“The largest additions in the rebalance, Johnson & Johnson (NYSE:JNJ) was around 50 and 40 basis points incrementally. J&J underperformed in the quarter while its normalized free cash flows held steady and so its position size was topped off to match the stable cash flows.”
For more cutting edge investment ideas, be sure to check out 10 Best Cryptocurrencies To Invest Your $1000 and 10 Dividend Stocks to Buy for Retirement in 2022 According to Reddit.
