Gold has been a hot commodity, pun intended, with the SPDR Gold Shares ETF (GLD) up 42% over the last 12 months. While we hope the trend continues, gold can remain stagnant for an extended period, and income-producing gold-focused funds can be appealing.
Covered call ETFs sell call options to generate income when the underlying asset pays little or nothing in the way of dividends; however, selling options for income can cap the potential upside gains. For example, the UBS ETRACS Gold Shares Covered Call ETN (GLDI) tracks the notional value of selling monthly 3% out-of-the-money calls on GLD. UBS states that GLDI has an expected current yield of 24.17%. However, when considering the total return, GLDI posted a 25.6% total return over the last twelve months, which is well below the 42% earned by GLD.
On July 8, Kurv ETFs launched a new gold ETF called the Kurv Gold Enhanced Income ETF (KGLD). I know that the folks at Kurv have developed some innovative strategies in the income ETF world. The Kurv Technology Titans Select ETF (KQQQ) has performed well for the subscribers of my Dividend Hunter newsletter service.
When I saw the news about KGLD, I wanted more information, so I set up a call with CEO Howard Chan. He told me the tactics they will use to have their gold income fund outperform the price of gold itself.
- Kurv will sell weekly options so they can quickly reset the strike prices of the options.
- The managers will compare the implied volatility of the options against the actual volatility of GLD to determine whether selling puts or calls for the week provides the best alternative.
We discussed at length how implied volatility for GLD can fluctuate above and below the realized volatility. That knowledge enables the Kurv team to make informed trades, which will help the fund meet its goal of outperforming GLD.
Dividends will be paid monthly, with an expected yield in the high single digits. Of course, KGLD is only a few weeks old, so it will take a few months to see how it performs.
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