In JEPI and the…Atlanta Falcons? I promised to follow up on a few other derivative income ETFs. In that post you get a dose of evergreen education on methodology. Today I’ll just present the charts with quick observations.
XYLD
This is the Global X SP500 covered call ETF. While JEPI manages $35B and has been around close to 5 years, XYLD was born in 2013 and manages $2.8B. It’s one of the largest derivative ETFs which shows just how big JEPI is!
Like JEPI, it’s perfomance degraded by mid July 2022. The second chart shows XYLD weekly returns on the y-axis vs SPY returns.
In this chart I note 2 things:
- A general observation: the rolling 1 year SPY sharpe has gotten over 2.0 4x in the past 6 years It spent all of 2021 up there and it touched 3.5 in late 2017!
- XYLD sharpe has been underperforming recently and massively underperformed during COVID. I do wonder to what extent it’s outperformance captured in the lookback thru early 2022 might have been due to call skew being strongly bid (overbid?) in 2021 — the year of mania, SPACs, NFTs, etc.
JEPQ
JEPQ is JP Morgan’s ETF that overwrites Nasdaq calls. It currently manages over $16B. It has a shorter history than JEPI and it’s performed quite well. But I would pause before inferring this to being Nasdaq specific before reading below.
QYLD
This is the Global X version of a Nasdaq call-overwrite ETF. It manages $8B.
Growth of $1 is not great relative to QQQ, but QYLD is also lower vol. So we look at the rolling sharpe. This has a longer history than JEPQ.
The sharp is often in line with QQQ but again has this skewed left tail to it where it can fall apart relatively. Zooming in on that Covid period, you see an extreme dip in the up/down capture driven by the up capture getting shelled plus the down capture spiking on that first Covid sell-off.
The behavior of the second chart is a bit strange. There is steeper underperformance than I’d expect on the downside (after all, the delta should roughly go to 1 and simply mimic the index) and the put performance is a stronger on some of the larger up moves than I’d expect…heck, I’d expect underperformance.
I have a subtle hypothesis for why we observe this. Perhaps the call skew and vols are sticker on the downside — the market drops but the call vols blow out so much that their realized delta is small. So it feels like you are riding stocks down with little offset from the calls depreciating.
On the up moves the calls which might have been too high to begin with massively underperform causing the ETF to do quite well. In other words, Nasdaq call deltas are much lower than you think!
This is just a guess and it’s a muddy one at that since we don’t see the same behavior in JEPQ and overall JEPQ has performed much better than QYLD and quite well on absolutely.
Could just come down to a skill issue? Hard to know without getting more into the details of the strategies for a finer attribution.