Roundhill 0DTE Funds: Uphill or Downhill for Investors

Over the last several week/months I noticed a lot of attention around the Roundhill 0dte(0 days to expiration) covered call funds XDTE, QDTE, and eventually, RDTE has been a very hot topic among basement financial gurus coming out of the woodwork. These funds are popular for their high distribution rate and weekly payment gimmick. In this short reading, we'll cover the good, bad, and who these funds are for. None of this is advice in any form consult with a professional.

First, we'll start with the good news.

XDTE has managed to keep up with the returns of the S&P500 so far since its inception date (03/07/24) we will see if that continues over time. I also like their use of European-style options on the SPX Index which are settled and can only be exercised at expiration. A significant portion of their distributions are return of capital which may be beneficial depending on the type of investor you are and your tax situation (consult a CPA). The weekly distributions on Friday are interesting and the selling point for many investors.

On a neutral note.

They use deep-in-the-money calls for the long position and sell same day out of the money calls for their short position. The strategy is called a "synthetic covered call". This type of strategy can be good or bad depending on the situation versus traditional covered call strategies. High-distribution yields come from the capital efficiency of this strategy where they can sell more spreads. In a market crash, the long options can lose a significant amount of value or become worthless if the contracts become out of the money and near expiration. This can also be protection from further losses versus owning the underlying as well and also why this is a neutral point.

Now for the bad news.

This fund has an expense ratio of 0.95% which is very high for a covered call fund. The fund will miss out on any upside potential past the short strike potentially underperforming the index long term. In a bear market, these may underperform monthly covered calls as daily premiums decline with the market price. Another concern is how much of a loss their long options will have if the S&P500 crashes.

Who are these 0dte funds for?

If you believe the options market is inefficient and want exposure to selling 0dte options then this fund is for you. If you need proof of income or a yield boost a little of this mixed with other ETFs might be for you. If you wanted poor man's covered calls on SPY/QQQ/IWM or SPX/NDX/RUT then this is a capital-efficient way to do it without a lot of money. If you want weekly income from an ETF these are the only ones doing it as of now. If you think the market will be sideways then this will likely outperform the index. If you need to see income to stay motivated then a few shares could be fine.

https://www.roundhillinvestments.com/etf/xdte/

Alternatives and other ETFs.

ISPY is a 1DTE S&P500 covered call fund from Proshares with a 0.55% expense ratio. They hold swap agreements for exposure to the S&P500 Daily Covered Call Index and pay monthly.

https://www.proshares.com/our-etfs/strategic/ispy

SPYI is a monthly S&P500 covered call fund from NEOS with a 0.68% expense ratio. They will sometimes buy a call against the short call to capture more upside potential. This and the stable monthly distribution history of the fund make it my favorite monthly covered call fund if I were forced to pick a monthly index covered call fund.

https://neosfunds.com/spyi/

At the time of writing, I do own 20.55 shares of XDTE just for fun and the weekly gimmick, and might grab a few shares of RDTE when that comes out. This is a very small percentage of my portfolio and I would be hesitant to have these as >5-10% of my portfolio combined due to the risk and underperformance.

1 comment