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Generating A 10% Yield From Combining Three ETFs From Global X

Warren Buffett once said, "if you don't find a way to make money while you sleep, you will work until you die."

Many investors look to income investing to generate passive income. This has become a popular wealth-building strategy. An investor will assemble a portfolio of dividend-paying stocks, bonds, and funds to generate cash without expending extra work or input on the investor's behalf. The passive income generated from these investments occurs while your time is spent earning other forms of income or enjoying quality time or retirement if you're lucky enough. Warren Buffett once said, "if you don't find a way to make money while you sleep, you will work until you die." Income investing can become a powerful tool that builds wealth throughout your life and offsets the loss of income during retirement by taking the dividend disbursements as cash payouts.

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There are many strategies to generate an income-producing portfolio. There isn't necessarily one correct theory as many combinations can help achieve the end goal of generating sustainable passive income. What if I told you that investing in the combination of three ETFs from Global X could generate monthly distributions and the overall yield would be in the low double-digits while the investments were directly in the S&P 500, the Nasdaq 100 index and the Russell 2000 index? What if an unconventional strategy could deliver double-digit yields? I would anticipate being asked what is the catch? If your willing to take the premise of income investing at face value as the goal is to produce consistent passive income and forgo the prospects of substantial capital appreciation, there isn't a catch. Global X has put together three income-focused ETFs that utilize a buy-write covered call strategy to generate premium from writing options against the underlying assets in their portfolio. This creates large amounts of income paid to investors in the form of monthly distributions.

An Overview Of QYLD, RYLD & XYLD From Global X and How They Can Supersize The Amount Of Passive Income You're Generating

The Nasdaq 100 Covered Call ETF (QYLD) from Global X invests in stocks within the Nasdaq 100 index. The Nasdaq 100 index comprises 100 of the largest domestic and international non-financial companies listed on the Nasdaq Stock Market based on market capitalization. The most well-known companies in America, such as Apple (AAPL), Microsoft (MSFT), Amazon (AMZN), Alphabet (GOOG), and Facebook (FB), create the top five holdings in QYLD. The Global X S&P 500 Covered Call ETF (XYLD) invests in companies throughout the S&P 500 index. Similar to QYLD, its top five holdings are also AAPL, MSFT, AMZN, FB, and GOOG. The third fund in this strategy is the Russell 2000 Covered Call ETF (RYLD) which invests directly in the Vanguard Russell 2000 ETF (VTWO). VTWO tracks the Russell 2000 index, which is a broad-based small-cap U.S. equity index, and VTWO tracks the Russell 2000 index and has 2068 holdings with $6.5 billion in total net assets.

QYLD, RYLD, and XYLD are unique as they follow a "covered call" or "buy-write" strategy. These ETFs make investments within these indexes, then turn around and sell covered corresponding call options on the same index. Each time the fund writes a covered call option, the fund generates a premium from the investor who buys the option from the fund. The premium paid by the buyer of the option provides income in addition to any dividends generated by their investments. QYLD, RYLD, and XYLD utilize an at-the-money call option strategy, and the options are written systematically monthly.

So, what is a covered call? All call options represent a block of one hundred shares (1 call option = 100 shares).

Per Investopedia:

"A covered call refers to a financial transaction in which the investor selling call options owns an equivalent amount of the underlying security. To execute this an investor holding a long position in an asset then writes (sells) call options on that same asset to generate an income stream. The investor's long position in the asset is the "cover" because it means the seller can deliver the shares if the buyer of the call option chooses to exercise. If the investor simultaneously buys stock and writes call options against that stock position, it is known as a "buy-write" transaction.

QYLD, RYLD, and XYLD charge a net expense ratio of 0.60% to implement this investment strategy. This style isn't ideal for everyone as much of the upside potential is capped due to the covered calls which are sold. The trade-off is an immense amount of monthly distribution income that can be reinvested each month or taken as cash. Capital appreciation and growth shouldn't be a concern if you're looking to generate passive income. With double-digit yields and monthly distributions, these investments can increase a tremendous amount by reinvesting the distribution's over a long period. As each distribution is reinvested, the future distribution becomes larger through the power of compounding.

(Source: Global X)

(Source: Global X)

Putting QYLD, RYLD & XYLD To Work And Generating Passive Income

At the beginning of January 2020, prior to the pandemic, XYLD traded for $50.39 per share while QYLD was $23.84 and RYLD was $25.54. An investment of $9,977 would have purchased 100 shares of each ETF. 2020 was arguably the toughest business environment companies have navigated. Some well-known high-yield investments cut or slashed their dividends. The most interesting aspect of QYLD, XYLD, and RYLD is how they generate their distributions. They're not dividend harvesting from investments; their distributions are predicated on writing call options on the indexes they're investing in. As this process replicates, income is generated and paid monthly to its investors.

These investments would have provided stable income throughout an uncertain period, and for income investors, especially ones that are retied, this is a critical aspect. Overall, owning 100 shares of each ETF would have generated $865.65 in income throughout 2020. This would have been an annual yield of 8.68%, and investors would have seen an average of $72 per month being generated from these income-producing ETFs. Being able to generate an annual yield of 8.68% from the combination of three funds and in the environment that emerged in 2020 was sensational. As the country recovered and the market rebounded, these funds could generate additional premiums from their covered calls allowing the distributions to increase at the end of 2020.

(Source: Steven Fiorillo) (Data Source: Global X)

(Source: Steven Fiorillo) (Data Source: Global X)

The premise of this article is that by investing evenly across QYLD, RYLD, and XYLD, generating a double-digit yield is attainable. In the first seven months of 2021, the combination of owning 100 shares of these ETFs has paid out $593 compared to $433 in 2020. This is an increase of $160 or 36.83%. The average monthly income in 2021 from these investments has been $85. Based on the first seven months of 2021, investors could expect to generate an additional $423 for the remainder of the year from QYLD, RYLD, and XYLD. This would place their annual distribution income at $1,016.23, which is a forward yield of 10.19%.

(Source: Steven Fiorillo) (Data Source: Global X)

(Source: Steven Fiorillo) (Data Source: Global X)

How QYLD, RYLD & XYLD Can Supercharge Our Future Income By Utilizing The Powers Of Compounding

XYLD and QYLD have both paid monthly distributions since their inception back in 2014. For younger income investors such as myself, compounding a 10% yield can become a powerful tool. Capital appreciation prospects are limited as upside potential is capped due to the covered calls, but this doesn't mean your investment can't grow and generate additional income.

If you had purchased 100 shares of each ETF on 1/7/20, it would have cost $9,784. Using the ETF investment calculator, calculate what the investment would be worth today, including reinvesting the distributions your initial investment would be worth $11,200.37. This would be an increase of $1,416.37 (14.48%). If you were taking the distributions as cash since 1/7/20, you would only have 100 shares of each ETF, which would generate $988 in annual income based on today's distribution. If you were reinvesting those distributions and decided to switch off the dividend reinvestment option and take the future distributions as cash, you would now be generating $1,134.13 in future income. In a little more than a year and a half, your annual distribution income would have increased by $146.13 (14.79%).

(Source: Steven Fiorillo) (Data Source: DQYDJ)

(Source: Steven Fiorillo) (Data Source: DQYDJ)

Conclusion

QYLD, RYLD, and XYLD are unconventional ETFs that utilize a covered-call strategy to generate income. I think this is an interesting idea. I have invested in all three funds as they don't rely on dividend harvesting, rather collecting the premiums monthly from the options they write against the respective indexes. Global X has a long enough track record with QYLD and XYLD and maintained this practice throughout the pandemic to make me a believer. Based on today's distributions, if you were to invest in them evenly, you could yield farm in the low double-digits without doing any work. Suppose you're in a position where you don't need the income today and have years to benefit from reinvesting the distributions. In that case, this investment strategy could become a huge income generator your future self will be thankful for.

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