Before we get started, this is a good writeup for the wheel option strategy.
https://www.reddit.com/r/options/comments/a36k4j/the_wheel_aka_triple_income_strategy_explained/
I’ve been re-adjusting my portfolio to slowly try get a better risk-adjusted return. The bulk of my portfolio is stuck index funds but my individual picks (thus far) have all exceeded my benchmark SP500 and total market tickers. Given my portfolio size, running the wheel (and being able to take lots of 100 shares) doesn’t make sense because it would make up too large of a holding in my portfolio. I had been relentlessly searching for a company I was happy with <$10 but I largely didn’t find any. After several weeks to months of waiting and researching, I found the perfect solution for me. What I intend on sharing is my due diligence for your digestion, with the caveat that I’d love feedback on my line of thought.
The Play: Financial Select Sector SPDR Fund ($XLF)
$XLF is an ETF that’s been around for about 2 decades. It primarily tracks financial institutions with banks making up its largest holding followed by other financial entities such as insurance agencies. Their top 10 holdings (as for 3/31/2019) are: 1) BRK at 13%, 2) JPM at 11%, 3) BAC at 8%, 4) WFC at 6%, 5) C at 5%. The remaining include AXP, USB, GS, CB, and CME. $XLF has an expense ratio of 0.13% and quarterly dividend payments currently yielding about 1.9%.
The primary advantage of $XLF is that it is well-diversified. Everyone should already appreciate BRK and it’s diversity of assets but you would also own a few of the top banks all bundled in this ETF. As far as why I believe this is a good play? “Banks aren’t going anywhere.” I often see this as reasoning for a lot of causes. This isn’t going anywhere, that isn’t going anywhere. But let’s try to qualify this. $JPM processes about a trillion dollars alone every year. That number alone should be scary. Adding in other banks into this investment only strengthens the case to own $XLF unless you believe the world will somehow adopt a different vehicle to exchange currencies. (No, this isn’t a subtle endorsement of crypto so don’t even get me started.) The ETF’s top two banks are also well-diversified in their revenue streams, unlike (for example) $GS which is primarily an investment bank. This gives a bit of industry specific added protection against a downturn.
Specific to the wheel, $XLF offers a neat advantage in that you are less exposed to earnings. You don’t have to dodge your expiry dates since the risk is really spread out over the course of time, allowing you to move in and out of positions with a bit more freedom. $XLF also pays a modest 1.9% quarterly dividend, so if you do get assigned- at least you can earn some money. $XLF, despite being an ETF, actually has pretty darn good volume/liquidity. It’s no $SPY, but it certainly has weekly options for your picking.
The biggest risks I see to this play included current interest rates and the industry’s low PE multiple. Since the financial crisis, this ETF has poorly performed compared to the SP500. Banks have not gotten a good return in this historic recovery, though have made steady, less volatile gains. (This can be a benefit if your goal is to get more of continuous income rather than high flying growth.) The current state of interest rates also leave a big question mark. Undoubtedly, the 2Y10Y is the lowest it has been since the crisis, suggesting that the banks have very little room to improve their earnings. Couple this with the now apparent global slowdown, growth is likely to decrease. All this being said, every industry will be affected by interest rates, banks just moreso.
Summary: $XLF is a decent candidate to run the wheel strategy with. It is well diversified, dividend bearing, and has good liquidity. The primary holdings are well established companies that I believe most investors would be happy to own. However, the recent (<10 year) return in this industry has been meager and is most susceptible to current economic fears (interest rates and global slowdown/lending slowdown).
Submitted April 20, 2019 at 10:23AM by teletwang99 http://bit.ly/2DmRFAW
