State Street Investment Management debuted a new ETF portfolio: eleven Select Sector SPDR Premium Income ETFs, each combining conventional sector exposure with a covered-call approach to increase income potential.
These are the first of their kind funds targeting income generation in specific sectors.
What Makes Them Unique
All these funds invest heavily in the shares of the corresponding Select Sector SPDR ETFs, and routinely writes call options over its holdings. This strategy is designed to generate steady income through option premiums, in addition to any dividends from equities. Managers roll the options every one to two months or so to remain ahead of premiums and market moves.
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11 Sector-Specific Funds Managing Corresponding Select Sector SPDR Funds:
- The Communication Services Select Sector SPDR Premium Income Fund XLCI — invests in the shares of the Communication Services Select Sector SPDR Fund XLC
- The Consumer Discretionary Select Sector SPDR Premium Income Fund XLYI — invests in the shares of the Consumer Discretionary Select Sector SPDR Fund XLY
- The Consumer Staples Select Sector SPDR Premium Income Fund XLSI — invests in the shares of the Consumer Staples Select Sector SPDR Fund XLP
- The Energy Select Sector SPDR Premium Income Fund XLEI — invests in the shares of the Energy Select Sector SPDR Fund XLE
- The Financial Select Sector SPDR Premium Income Fund XLFI — invests in the shares of the Financial Select Sector SPDR Fund XLF
- The Health Care Select Sector SPDR Premium Income Fund XLVI — invests in the shares of the Health Care Select Sector SPDR Fund XLV
- The Industrial Select Sector SPDR Premium Income Fund XLII — invests in the shares of the Industrial Select Sector SPDR Fund XLI
- The Materials Select Sector SPDR Premium Income Fund XLBI — invests in the shares of the Materials Select Sector SPDR Fund XLB
- The Real Estate Select Sector SPDR Premium Income Fund XLRI — invests in the shares of the Real Estate Select Sector SPDR Fund XLRE
- The Technology Select Sector SPDR Premium Income Fund XLKI — invests in the shares of the Technology Select Sector SPDR Premium Income Fund XLK
- The Utilities Select Sector SPDR Premium Income Fund XLUI — invests in the shares of the Utilities Select Sector SPDR Fund XLU
The expense ratios of each of the funds are 0.35%, roughly 62% lower than the derivative income ETF average (~0.92%).
Distribution happens monthly, combining premiums from options and underlying dividend income.
Who Might Benefit
These investments are customized for those who want sector tilts while reaping additional yield without fully embracing active management.
Anna Paglia, State Street Investment Management’s Chief Business Officer, highlights how these products allow investors to combine sector knowledge with income generation, all in a single trade.
While earning income with appeal, these high‑income strategies can restrict participation in strongly rising markets, as the sold call options cap gains. Moreover, every fund is sector‑oriented, which could lead to volatility under some circumstances.
Bottom Line
State Street currently has more than $325 billion sector ETF assets under management worldwide and more than $5 trillion AUM combined (as of June 30).
State Street’s new Select Sector SPDR Premium Income ETFs provide sector-specific exposure with added income, through covered-call overlays. At a lower cost than many peer derivative income ETFs, they represent a tidy, one-stop solution, albeit with investors being mindful of upside restrictions and sector concentration risk.
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