QQQY: Yield Not Worth The Risk And Vulnerabilities

seekingalpha06-07

piranka/E+ via Getty Images Overview I believe we are currently living in one of the best times in history to be a high dividend yield investor. There are so many different high yielding asset classes...

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There are so many different high yielding asset classes...</p>\n\n<a href=\"https://seekingalpha.com/article/4697896-qqqy-yield-not-worth-the-risk-and-vulnerabilities\">Source Link</a>\n\n</div>\n","source":"seekingalpha_fund","html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>QQQY: Yield Not Worth The Risk And Vulnerabilities</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nQQQY: Yield Not Worth The Risk And Vulnerabilities\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-06-07 05:57 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4697896-qqqy-yield-not-worth-the-risk-and-vulnerabilities><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>piranka/E+ via Getty Images Overview I believe we are currently living in one of the best times in history to be a high dividend yield investor. There are so many different high yielding asset classes...</p>\n\n<a href=\"https://seekingalpha.com/article/4697896-qqqy-yield-not-worth-the-risk-and-vulnerabilities\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"QYLD.AU","symbol_name":"GLB X NASDAQ100 COVCALL ETF","start_time":0,"source_url":"https://seekingalpha.com/article/4697896-qqqy-yield-not-worth-the-risk-and-vulnerabilities","article_id":"2441773132","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/136382131/image_136382131.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2441773132","pubTimestamp":1717711028,"sourceInfo":{"source_id":"seekingalpha_fund","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"piranka/E+ via Getty Images Overview I believe we are currently living in one of the best times in history to be a high dividend yield investor. There are so many different high yielding asset classes","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"QYLD.AU":"GLB X NASDAQ100 COVCALL ETF",".IXIC":"NASDAQ Composite","SQQQ":"纳指三倍做空ETF","BK4593":"纳斯达克ETF","QLD":"纳指两倍做多ETF","QYLD":"纳斯达克100 Covered Call ETF-Global X","PSQ":"纳指反向ETF","BK4534":"瑞士信贷持仓","BK4585":"ETF&股票定投概念","FEPI":"REX FANG & INNOVATION EQUITY PREMIUM INCOME ETF","FDN":"First Trust Dow Jones Internet I","QQQY":"Defiance Nasdaq 100 Enhanced Options & 0DTE Income ETF","TQQQ":"纳指三倍做多ETF","BK4550":"红杉资本持仓","BK4588":"碎股","QQQ":"纳指100ETF","SPYI":"NEOS S&P 500 High Income ETF","BK4561":"索罗斯持仓","BK4581":"高盛持仓","QID":"纳指两倍做空ETF"},"translate_title":"QQQY：收益率不值得承担风险和漏洞","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"US6M.BOND":1,"US10Y.BOND":1,"SPYI":1,"QYLD.AU":1,"QYLD":1,"QQQY":1,"US12M.BOND":1,"US2Y.BOND":1,"US30Y.BOND":1,"US3Y.BOND":1,"US5Y.BOND":1,"FEPI":1,"US7Y.BOND":1,"FDN":0.9,".IXIC":0.68,"US912797HE00.BOND":0.6,"US912797FS14.BOND":0.6,"US912797GB79.BOND":0.6,"US912797GK78.BOND":0.6,"US912797GL51.BOND":0.6,"US912797GW17.BOND":0.6,"TQQQ":0.6,"SQQQ":0.6,"QQQ":0.6,"QLD":0.6,"QID":0.6,"PSQ":0.6,"NQmain":0.6,"MNQmain":0.6},"content_text":"piranka/E+ via Getty Images Overview I believe we are currently living in one of the best times in history to be a high dividend yield investor. There are so many different high yielding asset classes and funds that exist now, that it can be a bit overwhelming to know which one is a good fit for you. Defiance has launched a relatively new covered call ETF, Defiance Nasdaq 100 Enhanced Options Income ETF (NASDAQ:QQQY) with an inception dating back to September of 2023. However, upon the first glance of the price chart, QQQY looks a bit scary with a consistent price decline. Data by YCharts We can see that the price has declined by nearly 30% since the fund's launch. Despite this price decline, QQQY has managed to remain with a positive total return of over 13%. This can be attributed to the absolutely massive distribution yield of over 63%. This dividend yield is abnormal due to the option writing strategy that QQQY uses. The great thing about a high yield like this is that the distributions are issued out on a monthly basis, making it a very useful resource for income building. This income can be used to fund lifestyle expenses or simply be reinvested back into other areas of your portfolio. Just for some context, QQQY is a put-write ETF that implements daily options in order to generate these large yields. The ETF maintains equity exposure to the Nasdaq-100 index while having net assets that equal roughly $250M. The ETF is actively managed and has an expense ratio of 0.99%. While the dividend yield is huge, I find it very hard to recommend since a lot of the performance is being taken away by the consistent price deterioration. Unfortunately, I do not believe that the price movement will see any type of improvement over the long term because of the flawed underlying option strategy of using at-the-money puts. Strategy & Vulnerabilities Part of QQQY's strategy is to employ an option strategy that helps the fund generate the income needed to support the high distribution yield. They do this by selling daily put options that are price at-the-money or up to 5% in-the-money. This strategy allows for a little upside price recognition if the fund sells an option that is priced above the current market price. However, this 5% gap may not always be used and even if it were, we can see from the price history that QQQY's strategy doesn't really capture much upside movement, with the price consistently trending downward since inception. I believe that this at-the-money strategy is a bit inferior, as it doesn't allow for price upside to be captured from the gains of underlying assets. For comparison, covered call ETFs that use a out-of-the-money strategy may have lower yields, but they don't destroy invested capital because this strategy allowed for additional upside to be captured. We can see the difference in performance when comparing QQQY to something like NEOS S&P High Income ETF (SPYI) or REX FANG & Innovation Equity Premium Income ETF (FEPI), which both use an out-of-the-money option strategy. For added context, I also included Global X Nasdaq 100 Covered Call ETF (QYLD) since this fund uses an at-the-money strategy as well. Data by YCharts We can see that all of these alternatives capture more price upside and stability. This is the tradeoff that you make when opting for the much larger dividend yield of QQQY. This out-of-the-money approach means that more upside potential can be captured because the strike price of the options are typically set at a variable rate premium above the current market price. In comparison, QQQY's at-the-money strategy doesn't allow for the same upside potential to be captured before the options are exercised. I really like the visual that QYLD provides below as I believe it paints a good illustration of the difference of strategies, with the orange line essentially representing QQQY here and the navy line representing peers like SPYI and FEPI.   QYLD Presentation So while you are collecting a huge dividend yield from QQQY, you have to take the price deterioration into consideration. At the moment, the large yield has been able to offset the price declines by still providing a positive total return. However, is this really the best option for high yielding income? We can see that on a YTD basis, QQQY has underperformed these peers in total return while simultaneously having the largest price drop. Data by YCharts When it comes to holdings, QQQY's exposure is a bit unique because it holds some US treasury notes. Unlike some other covered call ETFs, QQQY does not hold individual equities as part of their portfolio of holdings. This makes it even more likely that less upside price movement is captured.   Defiance Distributions The latest monthly distribution has been confirmed at $0.8013 per share. This brings the current yield above 63%, which has the ability to produce some high levels of cash flow. To help support this massive yield, the fund aims to generate a consistent stream of income on a daily basis. They do this through the previously mentioned in-the-money put options and seek a daily amount of 0.25%. This higher yield can be achieved by the higher frequency of options deployed. These short term options are generally less than one week in duration, which yields higher income over long term options.   Seeking Alpha Additionally, I wouldn't count on much growth to happen, since you are already collecting a massive yield in the first place. The distribution has actually trended slightly downward since inception. The distribution income here is directly linked to the fund's performance of its option strategy. Something important to note with the distributions received from QQQY is that they are mainly classified as return of capital, according to the 19a-notice.   QQQY 19a-Notice Year to date, we can see that net investment income funded about 47.4% of the distributions. However, the larger 52.5% portfolio of the distribution consists of return of capital. This can be seen as a bit more tax efficient, since return of capital distributions are not typically taxed at the same rate as ordinary dividends. While I am sure that there are some investors out there that may find a good use case for a fund like QQQY, I struggle to see any long term value. I really love collecting high levels of income from different asset classes such as REITs, Business Development Companies, and Closed End funds, but there seem to be a lot more risks here with QQQY than benefits. The massive yield would be a nice additional to the portfolio, but I am not personally okay with the trade off of experiencing large price declines and massive drops in the NAV of the fund. I would however, consider exposure to a covered call ETF that used out-of-the-money option strategies instead and had a better set of holdings since this allows for more upside appreciation alongside the dividend. Outlook The NAV erosion remains my biggest concern here. The fund hasn't even been around for a year yet but the net asset value has decreased significantly. We've already discussed how the at-the-money strategy doesn't allow for upside, but this deterioration of NAV would also indicate that QQQY is straight up distributing more than it earns from the option income generated. Data by YCharts Going forward, this option strategy has zero protection against the downside risks of the market. This means you are capping your upside potential while remaining vulnerable to the full weight of downturns. So while your distribution income may be high, your principal would likely get destroyed in the event of a market crash. Since the underlying exposure is to the Nasdaq 100 index, which mostly includes technology based stocks, the volatility can be high as the sector trades at premium valuations. If the Nasdaq were to fall, you may have the high distributions there to offset the risk, but you will ultimately experience massive downside risk. Take into consideration that the Invesco QQQ Trust (QQQ) has seen strong performance on a year to date basis, while QQQY has suffered NAV and price decay. Data by YCharts On more of a short term outlook, the income aspect of QQQY may actually improve as volatility increases. We will likely have uncertainty in the markets caused by the US Presidential elections on the horizon. This would also be accompanied by ongoing talks of interest rate cuts that may be implemented from the Fed. As interest rates remain elevated and inflation starts to cool, we may see an increased possibility of rate cuts actually happening this year alongside the elections. Higher volatility typically means that covered call ETFs like QQQY can collect a higher premium for selling the options. Takeaway  In conclusion, QQQY's massive yield comes with a downside risk that I am not comfortable recommending. In addition, the fund aims to get exposure to the Nasdaq-100 index, but doesn't actually hold any of the underlying equities as part of the portfolio. The NAV and price decay experienced as negatively affected the total return potential, as the fund is not earning enough through its option strategy to fully support the payouts. Additionally, the at-the-money strategy doesn't allow for much upside while still presenting all of the downside risk. This is why I would rather find a covered call ETF that uses an out-of-the-money strategy, such as FEPI or SPYI. As a result, I rate QQQY as a sell.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2441773132"}