iShares Plans BuyWrite Bond Strategy ETFs

A trio of recent filings from BlackRock’s iShares arm outlines the issuer’s intention to roll out funds that hold iShares ETFs while writing options on them. Each fund replicates an index provided by Cboe Global Markets that tracks the performance of a strategy that holds a specific iShares bond ETF—while selling European-style call options on that ETF.

The three proposed fund are the iShares Investment Grade Corporate Bond BuyWrite Strategy ETF, the iShares High Yield Corporate Bond BuyWrite Strategy ETF, and the iShares 20+ Year Treasury Bond BuyWrite Strategy ETF. 

The filings do not include expense ratios, tickers or a listing exchange.  

The investment-grade fund will be tied to the performance of the $32.2 billion iShares iBoxx USD Investment Grade Corporate Bond ETF (LQD), while the high yield fund will be tied to the performance of the $13.4 billion iShares iBoxx USD High Yield Corporate Bond ETF (HYG). The 20+ Year Treasury ETF will hold the $18.5 billion iShares 20+ Year Treasury Bond ETF (TLT) as its main asset, according to the fund prospectuses. 

BuyWrite strategies are a popular type of covered call strategy that allow investors to earn income through the premium generated by the options contract. The strategy tends to dampen volatility, although some upside performance is generally sacrificed depending on market movements.  

However, all the ETFs using covered call strategies on the market today are equity funds rather than fixed income. The two largest BuyWrite strategies are the $7.1 billion Global X NASDAQ 100 Covered Call ETF (QYLD) and the $1.5 billion Global X S&P 500 Covered Call ETF (XYLD). Both have outperformed their corresponding plain vanilla counterparts over the past 12 months while demonstrating far less volatile price movements.  

QYLD offers a 12-month distribution yield of 13.46% versus 0.51% for the Invesco QQQ Trust (QQQ). Similarly, XYLD’s 12-month yield is 9.71% versus 1.32% for the SPDR S&P 500 ETF Trust (SPY). However, it should be noted that QYLD and XYLD write individual call options on each of the stocks in their associated indexes rather than on a reference ETF.  

Contact Heather Bell at [email protected]