ETF Education Report: XLII

What this ETF is trying to do

The STATE STREET(R) INDUSTRIAL SELECT SECTOR SPDR(R) PREMIUM INCOME ETF (ticker: XLII) is an exchange-traded fund designed to provide income. It is categorized as an "option income" ETF. This means it uses specific strategies to try and generate cash for investors. Its main focus is on the industrial sector.

What the numbers show

When looking at an ETF, it is important to know the difference between "price return" and "total return."

• Price Return: This only tracks how much the share price itself has changed. For XLII, the year-to-date (YTD) price return is approximately -2.48%, and the one-year price return is approximately -1.73%.

• Total Return: This includes both the price changes and the cash distributions (dividends) paid out. For XLII, the YTD total return is approximately 7.57%, and the one-year total return is approximately 11.73%.

To visualize this, if you look at the estimated price from roughly one year ago, it was about $24.67. The current price is $24.24. While the share price has gone down slightly, the total return shows that the combination of price and distributions resulted in a positive gain.

Income and distribution explanation

This ETF has a high distribution yield of approximately 13.33%. This represents the cash distributions relative to the ETF's price. These payments are usually made monthly, with 12 payments recorded over the last year. Most of these payments have been distributed on Mondays.

It is important to remember that a high distribution yield does not mean the investor earned that exact percentage as their total return. You must look at the "total return" figure to see the full picture of how the investment performed.

NAV erosion explanation

"NAV erosion" is a term used to describe when the value of the underlying assets in a fund decreases. While a falling share price can sometimes be related to this, they are not the same thing.

StockValueFinder uses an "erosion-risk score" to measure this risk. XLII has an erosion score of 94, which is labeled as "Stable / sideways." The erosion severity is rated as "good," and there is no severe erosion-risk flag for this ETF.

Pros

• The ETF provides a high distribution yield.

• The one-year total return is positive at approximately 11.73%.

• The erosion-risk measurements suggest the fund is currently stable or sideways.

Cons

• The share price has seen a slight decline (price return) both year-to-date and over the last year.

• Total return data for the three-year period was not supplied.

Top Holdings

The ETF's holdings can change over time. As of the latest update, its top holding is:

• STATE STREET® INDSTRLSELSECTSPDR®ETF (XLI): 99.78%

Beginner takeaway

When looking at income-focused ETFs like XLII, don't just look at the high yield. A high distribution yield can sometimes exist even if the share price is falling. Always compare the price return (the change in share cost) with the total return (the change in cost plus the cash you received) to understand how the fund is actually performing.