These ETFs Target 9% & 13% Income... Global X's New Income ETFs

[00:00:00]Hey everybody, welcome back to Dividend Stockpile. Today we're going to be talking about two great income ETFs from Global X that I think more income investors need to have on their radar.

[00:00:09]So, we're going to talk about Global X's EDGX and EDGQ income edge ETFs. To help with that, I'm joined by Chandler Nichols, VP, director of product at Global X. So, Chandler, welcome to the channel.

[00:00:24]>> Pleasure to be back.

[00:00:25]>> Absolutely. Really appreciate you coming back on. Um, for those who don't know, you were on the channel about, uh, 15 16 months ago, uh, talking about some other products at a previous company, but now that you're at Global X, I wanted to have you come on to talk about some of the great products you guys have over there at Global X. So, again, we're talking about EDGX and EDGQ, your income edge ETFs over there. So, for those who may not be familiar, can you give a little bit of background on Global X?

[00:00:52]>> Yeah, so so Global X, we're a we're a New York-based ETF provider. We we manage close to 100 billion in assets under management at the at the time of this discussion. More broadly speaking, we're a subsidiary of Marray asset, one of the larger global asset manager uh managers. Uh the the company's history is actually rooted in an international investing. So our first ETF that we ever launched was a Colombia ETF. Uh we're fairly well known. Uh our our bread and butter is in the thematic ETF space as well as the income ETF space too. Uh so we were actually one of the first pioneers in covered call option income investing. uh as well as being uh a pioneer in some of the early earlier days dividend investing uh and MLP uh related equity strategies as well. So um a nice dual focus in terms of our broader lineup um from the international and thematic all the way to the income side of things. Uh but our focus lately has been seeking to provide uh more transparent and uh and thoughtful income strategies.

[00:01:48]>> Love it. Love to see it. Yeah, Global X has definitely has some really great ETFs out there. uh especially your thematics and your income ones. I think a lot of investors who watch this channel are probably already invested in a lot of your funds, but it's really nice to be able to have you on the channel to really talk through in detail some of the funds. Uh so, as we mentioned at the beginning, it's EDGX, which is the US 500 income edge ETF and EDGQ, the NASDAQ 100 income edge ETF.

[00:02:14]So, can you give us a high level overview of both of these funds?

[00:02:18]>> Yeah, of course. So we're we're calling these our our income edge ETFs. They're an evolution of our cover call lineup.

[00:02:24]And the core focus of these products are stable income but with a focus on systematic active management. So as you mentioned we have two total. We call them Edjax and Ed HQ. Uh you have our US 500 uh income edge ETF will essentially get exposure to that US 500 index and write spy flex options on a weekly basis in order to generate its income stream.

[00:02:47]Uh similarly for HDQ similar process all just being taken place on the NASDAQ 100 index another very familiar uh index we'll use QQQ flex options for that particular strategy and the the punchline and the key goal in terms of what these strategies are seeking to accomplish is uh really seek to achieve two pre-specified annualized distribution rate targets. So for edge X 9% and edge Q 13%. The difference between those two is rooted in the implied volatility of those two reference assets. NASDAQ 100 really tends to be the more volatile. So therefore higher distribution target relative to that of uh the edge Q uh edge X ETF. So similarly uh weekly weekly writing calls uh call overwrite strategy with weekly distributions and uh and just to get ahead of this now because we do get asked this uh a lot from you know whether it be uh clients uh what have you um you know why these distribution rates why 9% 13% seems very specific. You know, one of the focuses for these strategies, you know, when we were creating them is really trying to find that balance because one of the biggest pieces of feedback, you know, that we've that we've heard and seen is uh it's not just about uh the distributions. The distribution rates are are are pretty competitive for both of these strategies, but we're also seeking to enable the ability for uh for price price appreciation potential and have stability as far as the total product experience goes.

[00:04:14]>> Absolutely. No, I I love the strategy of having a moderate yield, but then you know the potential for capital appreciation because at the end of the day, that's what all matters is the total return. You can have a 50% yield, but if you're value of your funds going down 40 or 50%, you're not really getting ahead. And so having the ability to have both the income, uh, which is a very solid income, as well as the potential for capital appreciation, I think that makes a lot of sense. Uh, there's so many different cover cult type of strategies out there. Each one does it a little differently, but I love, you know, you guys have a more conservative approach than some of the other ones out there. Um, so I guess with that, is the fixed distribution your primary um, you know, what sets you guys apart or is there um, other features that you'd like to highlight that kind of differentiates yourself from the others out there?

[00:05:02]>> Yeah, it's it's definitely a crux of it, right? like in in terms of the income targets, I would say the weekly call overwrite strategy paired with the weekly distributions uh keeps this succinct uh systemic process in terms of uh the you know actively managed approach that that these funds are taking. you know there's uh you know a lot of our uh core products in the cover call space multi-distributing funds you see the rise of weekly distributing ETFs we we took notice of this and we uh you know just keeping track of the evolution of the marketplace felt that that was a great direction to take these funds in order to differentiate versus uh some of the competitors in the marketplace. Um but you know it really comes down to that actively managed uh approach in terms of the overall strategy.

[00:05:45]It's very data driven in terms of being able to determine the strike prices in which the calls are being written at and the coverage ratio the partial coverage ratio strategy that's being incorporated here as well. So um we feel that those are the main differentiating uh components and it's rooted in this overall philosophy of offering this you know systemic uh systematic process that's repeatable. It's explainable.

[00:06:09]It's easy to understand uh given the complexity of the utilization of options. It's structured right? You have the income target uh and you have those trade-offs that are that are pretty well understood. If you're going to forego any level of upside participation, there's there understood trade-offs from the get- go in terms of the uh upside participation that's being foregone. Uh and it's well understood in terms of uh what the potential, you know, uh risk and reward out outcome could could look like for these types of strategies. And then the third aspect of it is really just the the simplicity of it and increases the scalability of these strategies within a broader equity asset allocation. You know, as I mentioned, we're getting access to pretty two well-known uh reference underliers as far as the long positions go. So, given that that they're they're fairly wellnown, it makes it easier for the investor to potentially slot into an equity allocation. So call it like the three S's is how we like to to say it here in terms of how we think about the broader um you know our broader option income franchise.

[00:07:13]>> Love it. Yeah. So that weekly distribution is obviously a very big differentiator. There's a lot that do monthly or even quarterly still. So having a weekly distribution definitely helps certain type of client but then also doing a shorter dated options. You know you guys are saying you're doing about a week at a time. There's plenty out there that are doing 30-day options and things like that. But um as I've talked about on previous discussions, you know, a lot can happen in a month.

[00:07:37]You know, the market can change, especially legally. And so to only have it as a weekly, um you know, DTE if you will, definitely allows you guys to adjust with the market and use that systematic approach that you were mentioning to really find the best strike price, the best amount out of the moneyiness, all the things that go into option selling gives you more opportunities to adjust.

[00:07:56]>> Exactly. You're benefiting from that.

[00:07:58]Call it theta decay, utilizing shorterdated options. So there's that that benefit of that more frequent reset as far as the strategy goes. But you know taking it even like a level deeper in terms of how the option overlay works. Uh as I mentioned dynamic uh coverage approach uh with you know a datadriven approach in terms of how the overall strike selection goes. So typically we would anticipate the options to be ridden anywhere from near to out of the money on a weekly basis.

[00:08:28]So dialing in on that dynamic coverage approach essentially each week the portfolio managers will seek to fluctuate that coverage ratio depending on the current market volatility dynamics that are occurring in the marketplace. Uh so you can think of it very high level this way. you know, if volatility if you s if you see a significant uptick in volatility, you know, in that scenario, the portfolio managers may seek to have lower coverage because you wouldn't need to cover as much of the portfolio to hit that 9 or 13% distribution target and you could potentially uh provide a better recovery path in a potential draw down period. Uh so you know taking that approach on the dynamic coverage side of things um and applying you know a level of uh out of the moneyiness in terms of the strike price in which those options are being written really enable that wholesome uh approach on that front. Um and the portfolios naturally it's being monitored daily. The the portfolio managers have the ability to still fluctuate uh coverage and be reactive during times of of certain market conditions. Uh so again, this that active management approach that um that really allows these strategies to to do what they do from a a um an income and return perspective.

[00:09:45]>> I love it. I love the ability to adjust depending on what the market is doing.

[00:09:49]You're not just doing x amount of the money for x amount of time. Like you're really reading what the market is doing and adjusting accordingly. And you know, you could just set it up where I'm going to do 2% out of the money for 30 days and then no matter what the market's doing. But that you know having a more active approach, more dynamic approach definitely give a better result over time in my opinion. We talked a lot about you know the the way you guys do the options. Um but at the beginning you mentioned it's uh flex options and so can you dig into a little bit more on that. Is that on the indices themselves?

[00:10:17]Let's just for instance the S&P 500 or the NASDAQ or how does that all work?

[00:10:22]>> Yeah, so they're ETF flex options. So we're writing uh flex options on the spy ETF itself for edge X and then the QQQ ETF option for edge Q. Uh essentially for for uh those in the audience who are don't know what flex options are you can think of them is call it the best of both worlds between over-the-counter and exchange listed options. you get the benefits of, you know, central clearing from uh the the usage of uh exchange traded options with the ability to customize some of the features within the options uh package itself. So, you know, taking it a step back, you know, ETF options, plain vanilla ETF options, they're American style. You have to physically settle them. They can be called early, etc. What we're doing here is we're have the ability to cash settle our our options while being able to hold them to expiration. And so they can only be exercised uh upon the actual expiration date. So it gives flexibility from that from that particular management standpoint. Um and through the usage of the ETF wrapper um you know there's the ability for these through the utilization of these types of options to enable more efficient tax loss harvesting opportunities to potentially increase the level of tax deferred uh distributions that these products make. So, return to capital in terms of uh the uh the overall tax treatment.

[00:11:45]>> Okay, awesome. Yeah, that that makes a lot of sense. It's so nice having the ETF wrapper because it does give you that ability to potentially have a more tax favorable treatment than if you were to do these options on your own as an individual. So, that's what I really love about these new income ETFs are out there. Uh, one last question I have regarding the option strategy is I know that you guys take a dynamic approach to, you know, how much of the portfolio is overwritten. Um, but with the yields at 9 and 13%, it feels like there could be some additional upside that you guys could capture, but how much on average is the portfolio overridden on any one point?

[00:12:17]>> It's a great question. I would say what we would anticipate in the long term would be anywhere from from 20 to 30%, so call it 25% if you will.

[00:12:26]>> Um, so yeah, it would we would it's it would it's anticipated to fluctuate, but that would be the a healthy range that I I think is um we would anticipate on that front. Yeah, that's such a a different strategy than what a lot of the other ones are doing. A lot of them are doing up to 100% overridden. So, you're really capping a lot of your upside with those types of strategies, but doing let's just say 25% overriding, you're still allowing 75% of the underlying um ETF to rise with the market if the market goes up. So, you're able to capture a lot of that uh return.

[00:12:56]and looking at your, you know, your total performance since inception, you guys are able to do pretty well when it comes to keeping up with the overall market, which we'll talk about in a little bit. So, yeah, I really love that, you know, 25% average overwritten because it allows you to have a lot more upside, um, potential than some of these other strategies out there. Um, so I guess with that total return since inception, uh, both of these products started in February and obviously I know just, you know, five months or whatever it's been since initiation isn't really a lot for a long-term trend, but you guys have done pretty good so far. Can you talk a little bit about the total returns?

[00:13:29]>> Yeah, of of course. So, as you as you mentioned, fairly new ETF, so you know, close to 5 months since they've since they've been around. Uh, even though they've had a shorter term track record, they they were tested right out right out of the gate in terms of their launch period. So we had some market turbulence in you know March and April of of of this year and we really saw that reactivity of the systematic active strategy on display. You had the market decline uptick in volatility in which both of these strategies were able to you know uh essentially participate in that bull market that that assumed afterward. So, you know, looking at EdX, you know, it's it's up close to 10% cumulatively since uh since its inception. Relative to the S&P, that's that's 11%. Uh and relative to the active derivative income uh Morning Star category, um it that's at 7%. So, keeping you know, keeping pretty close to the benchmark and outperforming a lot of its peers using Morning Star categories. And similarly for for for EdgeQ, you know, up close to rounding, you know, rounding up to close to 17% for that particular fund, uh, which is behind the NASDAQ got 20%. So again, it it comes down to the to the end to the to the trade-offs of what option income strategies are expected to do. You're foregoing a level of upside participation that that sort of uh performance is what we we would anticipate. uh but in terms of being able to stay at the tail of those reference indices is also what we're hoping to uh achieve and anticipate as well. So both you know trailing right behind the reference benchmarks but outperforming a lot of their peers in the act.

[00:15:07]>> Yeah that's really great. So again everyone who does cover call type of strategies understands that there's capping your upside may not be able to hit exactly just the underlying but having that additional income stream is really important to a lot of income investors. So that's the trade-off you have to make. But with you guys only doing around a 25% coverage, you know, hopefully you'll be able to keep up with the market pretty well all things considered and so far so good. So that's awesome. The last thing I want to talk to you about is and a lot of people have questions about this after afterwards is what are the expense ratios on these ETFs because I know a lot of the ETFs out there are pushing that 1% mark um for the expense ratio. So can you talk about what yours is right now?

[00:15:43]>> So right now the the gross expense ratio is 50 basis points for both of these products across the board. Right now, we do have a fee waiver in place uh which drives the net expense ratio down to down to zero for for both of these funds. So, no management fee to Global X as far as the the net expense ratio through March of 2027. Once that fee waiver expires, it would be 50 basis points. So, you know, being you know, being um sticking at that even at that 50 basis point mark, it it's still below the Morning Star category average, which is, as you mentioned, 1%. uh it's 88 basis points in terms of what the Morning Star category has uh as far as the expense ratios go. Uh so yeah, no we you know gross you know net naturally competitive at zero but even the gross is is fairly competitive as well.

[00:16:31]>> Yeah, exactly. That's definitely going to go a long way to increasing the interest from investors as well as providing a better total return over time because at the end of the day it's your net amount that you're going to get. So if your expenses are lower, you know, you can get better overall returns. All right. So, these both look really great. You guys had a good start to the both the products and they do pay a very good yield. 9% for Edge X and 13ish% for Edge Q is the target. Um, and hopefully some capital appreciation. So, where can people get more information about these two ETFs if they want to dig a little further into it? Yeah, of course. So, global xetfs.com through that website, you know, we have on the top banner our ETFs. Click on it, you'll have the whole list of all Global X's ETFs. they're there or you can use our search bar as well and easily find these.

[00:17:18]>> I'll throw that up on the screen in the description as well. I really appreciate you coming on channeler talking about these two ETFs. Just to recap is Edge X, the US 500 income edge ETF and EdgeQ NASDAQ 100 income edge ETF from Global X channel. I really appreciate your time and best of luck with these ETFs. Thank you. Appreciate it.

[00:17:38]>> Thanks for watching. While you're here, check out this next video to learn more about dividends, income investing, and option selling. Make sure you subscribe, click the like button. It really does help.