Why XYLD is Essential for Income Portfolios in Volatile Markets

The Global X S&P 500 Covered Call ETF (XYLD) has carved a niche as a tactical tool for income investors navigating volatile markets. By systematically employing covered call strategies—selling call options on the S&P 500 to generate premium income—XYLD offers a compelling balance of yield and downside protection. In a world where equity markets oscillate between bull rallies and corrections, this ETF's structure makes it a critical component for portfolios seeking steady income without excessive exposure to market swings.

The Mechanics of Covered Calls: Yield with a Ceiling

XYLD's strategy is straightforward: it holds the entire S&P 500 portfolio and sells at-the-money (ATM) call options monthly. Each sold call generates immediate premium income, which fuels XYLD's high trailing yield of 12.11% as of July 2025. However, this comes at a cost—the ETF forfeits gains above the strike price of the sold calls, capping upside potential.

This trade-off is intentional. In volatile markets, option premiums surge, boosting XYLD's yield. For instance, during the 2022 bear market, its yield spiked to 20%, while SPY's dividends remained flat. Conversely, in 2024's strong bull run, XYLD's yield dropped to 9.4%, reflecting lower premiums in calm markets. The result? A yield that fluctuates with volatility, making it a natural hedge against market instability.

Performance in Volatile vs. Calm Markets: A Tactic of Resilience

XYLD's historical performance underscores its role as a volatility buffer. In the 2020 pandemic crash, it fell 25%—a 9% smaller decline than SPY's 34% drop. Similarly, during the 2022 downturn, XYLD lost 12% versus SPY's 18% decline.

In 2024, however, XYLD trailed SPY by 5.4% as the broader market surged. This highlights its inherent trade-off: reduced downside risk in turbulent times, but muted upside in strong rallies. As of July 2025, XYLD's YTD return of -1.36% contrasts with SPY's +7.04%, reflecting its capped upside in a rising market. Yet, this underperformance is expected—covered calls are not designed to beat pure equity benchmarks in bull runs.

Why XYLD Belongs in Income Portfolios

For income-focused investors, XYLD's consistency is a standout feature. It has paid monthly distributions for 11 consecutive years, even through two bear markets. This reliability is critical for retirees or those dependent on portfolio income, especially when dividends from traditional equities (like SPY's 1.8% yield) fall short.

Moreover, its high correlation (0.81) to SPY means it aligns with broader market movements, but with lower volatility. SPY's one-month rolling volatility is 2.80%, while XYLD's is just 1.21%, thanks to premium income smoothing returns.

Risks and Considerations

No strategy is without drawbacks. XYLD's 0.50% expense ratio and tax inefficiency (distributions taxed as ordinary income) may erode long-term gains. Additionally, its synthetic swap-based construction introduces counterparty risk—a minor concern given counterparties like JPMorgan and Citigroup, but worth noting.

Investors must also accept that XYLD will underperform in sustained bull markets. In 2024, SPY outgained XYLD by nearly 6 percentage points, a gap that could widen in prolonged rallies.

Investment Strategy: Positioning for Volatility

XYLD is not a core equity holding but a tactical complement. Here's how to use it effectively:
1. Allocate a portion of your income portfolio (e.g., 10–20%) to XYLD to boost yield while reducing reliance on high-dividend stocks prone to volatility.
2. Pair with low-volatility stocks or bonds to balance the ETF's capped upside.
3. Monitor market conditions: Rotate into XYLD when volatility rises (VIX above 20) and consider trimming exposure during sustained bull markets.

Final Take

In a market where income generation is paramount, XYLD's covered call strategy offers a unique advantage: It delivers high, consistent payouts while tempering downside risk during turbulence. For income investors, this ETF is less about beating benchmarks in bull markets and more about securing steady cash flow through all cycles.

Bottom Line: XYLD is essential for portfolios needing income in volatile environments—but use it as a supplement, not a substitute, for core equity exposure.