Started in September of 2023, the iShares US Large Cap Premium Income Active ETF (BALI) is a fund that attempts to strike a favorable balance between monthly income and potential growth. BALI is an active covered call ETF, a strategy that may appeal to some investors for its income potential but dissuade others due to its capping of potential gains. Is the BALI ETF worth owning today, or do this fund’s cons outweigh its pros?
What’s Under the Hood of the BALI ETF Holdings?
BALI is an active ETF with an equity portfolio made up of select US large-cap stocks. The holdings at the top of BALI’s portfolio include familiar names like NVIDIA, Microsoft, Apple and Amazon that also top the S&P 500. In total, BALI includes 190 holdings actively selected by fund managers.
BALI sells call options on the stocks it holds as a means of generating income. With this option strategy, BALI attempts to deliver higher income than the overall equity market while also reducing volatility. This type of covered call strategy is far from unique to BALI, but it is frequently used by traders and funds to generate income at the cost of upside participation. In the case of BALI, however, investment in carefully selected large-cap stocks allows the fund to deliver the income associated with covered call strategies while sacrificing less of the upside that many covered call ETFs largely miss out on.
The overwhelming advantage of this strategy is that it allows BALI to distribute significant dividends on a monthly basis, rather than the quarterly distribution schedules followed by the overwhelming majority of dividend-paying stocks. BALI also offers significant income compared to most dividend stocks. The ETF’s distribution rate, a metric that annualizes the most recent distribution and divides it by the fund’s NAV, currently stands at 7.4 percent. For reference, the current dividend yield of the S&P 500 as a whole is just 1.2 percent.
BALI’s 14.2% Return Nothing To Sneeze At
Although it has some attractive qualities for income investors, it’s also worth noting that BALI carries its share of risks. To begin with, options income strategies tend to perform reasonably well in moderately bullish or bearish markets, but they can significantly limit upside growth during long periods of bullish stock market activity. This could be particularly relevant now, given that most observers and analysts expect significant growth in the coming years as a result of AI and other technologies maturing and entering wider use.
While BALI has been able to generate a respectable return of 14.2 percent over the last year by focusing so heavily on large-cap stocks, this has significantly trailed the S&P 500 benchmark’s performance of 17.9 percent over the same period. As such, BALI may not be particularly attractive for long-term portfolio growth. A similar trend can be seen in the time since the fund’s inception, during which BALI has returned 54.2 percent against the S&P’s 65.2 percent.
Compared to benchmark index funds, BALI, being an active ETF, also carries significantly higher fees. BALI’s expense ratio is 0.35. While this may not sound outrageous, it’s worth noting that this is more than 10 times the iShares Core S&P 500 ETF’s expense ratio of just 0.03. Though BALI’s income more than makes up for this, it does once again limit the fund’s appeal when it comes to consistent growth by saddling investors with much higher fees than basic index funds.
Although BALI’s dividends are significant, it’s also useful for investors to keep in mind that they can vary quite a lot from month to month. In the last six months alone, for example, BALI’s monthly payout has ranged from a low of $0.18 to a high of $0.25. This makes BALI less reliable for regular, predictable income than most dividend-paying stocks, somewhat offsetting the advantage of its higher distributions. Distributions from covered call ETFs are also usually less tax-efficient than regular dividends, potentially creating larger tax liabilities for investors.
Finally, BALI, like the S&P 500 itself at the moment, may have a degree of concentration risk built into it. The top three holdings in the fund account for over 18 percent of the total, and over 41 percent of the fund’s holdings are in either information technology or communications. While the S&P is also quite top-heavy at the moment, this could put BALI at similar risk if tech stock prices contract or a rotation into more traditional value stocks takes place.
So, Is BALI an ETF to Own?
Because of the risks outlined above, BALI may have a hard time fitting into many portfolios. Investors focused on growth may find the ETF less appealing than a basic index fund for both its lower potential for price appreciation and its higher expense ratio. Income investors, meanwhile, may find BALI’s high distribution rate appealing but balk at the degree to which its distributions can vary from month to month.
With that said, BALI does solve some of the challenges traditionally associated with option income ETFs by focusing on large, high-quality businesses. This can be seen in the fund’s trailing 12-month return, even though that return lagged the S&P 500. On the income side, BALI’s inconsistency appears to be largely made up for by its high distribution rate, making it a potentially useful part of a larger income portfolio. The question is whether or not this strategy will work well for BALI over the long run, as the fund is still fairly young and has yet to be tested by a major market crash.
All told, BALI may be appealing for some investors as a choice for balancing higher income and a decent measure of growth. Even so, BALI’s risks may make it something of a niche fund that may not necessarily appeal to a wide range of investors. Considering the high growth rates that the market has delivered in recent years and the ongoing promise of higher earnings through innovation, now may not be the time for covered call ETFs like BALI.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.