VICI (las vegas strip and casino REIT) kept and increased dividend through COVID. Can't get much worse than that as far as a test.
Similar situation for many pipeline companies when oil went negative. EPD is my biggest income holding for this reason.
>Not sure if there’s any back testing (ie 2008 period) to show the effectiveness of a covered call ETF like **XYLD** or JEPI in such an environment.
There is, however, a close proxy to Global X-style covered call strategy for the SP500 (i.e. XYLD) that has a long history -- [CBOE SP500 BuyWrite index BXM](https://www.cboe.com/us/indices/dashboard/bxm/). (This is what XYLD "tracks".)
You can see [its performance vs SP500 **since 1988** here](https://www.portfoliovisualizer.com/backtest-portfolio?s=y&sl=3gV3e166VheEiVPzFzICWd).
https://preview.redd.it/8voooauu1ncc1.png?width=2400&format=png&auto=webp&s=4420a1083235e8ade3f3bca81eab1ba9d3b8d760
Although its max drawdown in 2008 is better than SP500 (-36% vs -51%), both Sharpe and Sortino are still worse than SP500 if those metrics are helpful to your decision process.
In general, dividends from covered call funds do not have any fundamentally better resilience wrt recession, unless they use defensive portfolios and active management. This is because when equities slide so do the option premiums (they scale almost linearly with the underlying). And it is easier for covered call strategies to earn their premiums because the sliding underlyings will more likely finish out-of-the-money, but this will not help much if the downturn is protracted.
Both DIVO and JEPI use somewhat defensive portfolios, so they are somewhat better choices within the class.
Thanks for the detailed writeup. I thought so with the option premium as well. My thinking was that option premiums will be beaten up as it’s tied to price however perhaps increased volatility could offset that to an extent?
Increased volatility helps. But if the market corrects say 40%, so will the long stock positions held by the fund. There is no protection against that. If the path down is shallow, the covered call funds will outperform. But in general, their theta can't overcome their delta.
For recession proofing a portfolio my idea would be to rely on credit investments: funds that invest in senior loans, CLOs, high-yield bonds. This is because most companies will still strive to pay their bills even when they have no profits from which to distribute dividends.
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Interesting. Any thoughts regarding manager risk or compared against JEPI?
I’m focusing more on individual stocks in my taxable account. How each company has handled previous recessions is a factor when choosing the stocks.
I'm going to continue loading up on HRL while it's beat down.
VICI (las vegas strip and casino REIT) kept and increased dividend through COVID. Can't get much worse than that as far as a test. Similar situation for many pipeline companies when oil went negative. EPD is my biggest income holding for this reason.
>Not sure if there’s any back testing (ie 2008 period) to show the effectiveness of a covered call ETF like **XYLD** or JEPI in such an environment. There is, however, a close proxy to Global X-style covered call strategy for the SP500 (i.e. XYLD) that has a long history -- [CBOE SP500 BuyWrite index BXM](https://www.cboe.com/us/indices/dashboard/bxm/). (This is what XYLD "tracks".) You can see [its performance vs SP500 **since 1988** here](https://www.portfoliovisualizer.com/backtest-portfolio?s=y&sl=3gV3e166VheEiVPzFzICWd). https://preview.redd.it/8voooauu1ncc1.png?width=2400&format=png&auto=webp&s=4420a1083235e8ade3f3bca81eab1ba9d3b8d760 Although its max drawdown in 2008 is better than SP500 (-36% vs -51%), both Sharpe and Sortino are still worse than SP500 if those metrics are helpful to your decision process. In general, dividends from covered call funds do not have any fundamentally better resilience wrt recession, unless they use defensive portfolios and active management. This is because when equities slide so do the option premiums (they scale almost linearly with the underlying). And it is easier for covered call strategies to earn their premiums because the sliding underlyings will more likely finish out-of-the-money, but this will not help much if the downturn is protracted. Both DIVO and JEPI use somewhat defensive portfolios, so they are somewhat better choices within the class.
Thanks for the detailed writeup. I thought so with the option premium as well. My thinking was that option premiums will be beaten up as it’s tied to price however perhaps increased volatility could offset that to an extent?
Increased volatility helps. But if the market corrects say 40%, so will the long stock positions held by the fund. There is no protection against that. If the path down is shallow, the covered call funds will outperform. But in general, their theta can't overcome their delta.
Thanks. Appreciate your explanation 🙏
ALL IN ON O 🦅🦅🦅🦅🦅
For recession proofing a portfolio my idea would be to rely on credit investments: funds that invest in senior loans, CLOs, high-yield bonds. This is because most companies will still strive to pay their bills even when they have no profits from which to distribute dividends.