QDTE: A New Fund That Writes Daily Options And Pays Weekly

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bymuratdeniz/iStock via Getty ImagesRoundhill N-100 0DTE Covered Call Strategy ETF (BATS:QDTE) is a relatively new fund in the ever-growing class of covered call funds which are getting increasingly ...

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This fund aims to write daily covered calls on the Nasdaq index (QQQ) and try to take advantage of the daily theta decay similar to some other funds such as Defiance Nasdaq 100 Enhanced Options Income ETF (QQQY) and QQQT Defiance Nasdaq 100 Income Target ETF (QQQT) even though QQQY mostly sells cash covered puts which is in theory the same thing as selling covered calls even though it uses a slightly different process. Another thing that sets QDTE apart from others is the fact that the fund makes weekly distributions. It typically announces each week's distribution on Wednesday which is followed by Thursday being the ex-dividend date and payments are distributed on Friday. The weekly processing of payments probably costs the fund extra money but its fees are similar to other similar funds that make monthly payments. For example, QDTE charges a fee of 0.95% which is comparable to QQQY's expense ratio of 0.99% or the expense ratios of a variety of YieldMax funds that range from 1% to 1.25%. The fund has only been around for a few months so it's difficult to talk about a long term performance but when we pit it against other highly popular covered call funds, its performance is about in the middle with total returns of 6.56% so far. Data by YChartsWhen we compare the fund against its underlying (QQQ) as well as the overall index (SPY), its performance falls slightly below both benchmarks. Since this fund's inception, S&P 500 index is up 8.25% and Nasdaq is up 8.21% in a similar fashion while this fund was able to capture about three fourths of this performance. Data by YChartsAs for distributions, they have been quite varied from week to week. As you can see below, weekly distributions ranged from 14 cents per share to 35 cents per share, and not two weeks have been alike. When you take the average of all these distributions and annualize them, you are getting an annualized yield of 35-40% which indicates me that a good portion of the yield will come from ROC (Return of Capital) because the fund is distributing more than it is making in net income. As we saw above, the fund is trailing the overall index by about 20-25% and the index is up about 20-25% this year, so the fund's total returns will likely be in the 15-20% range, which means the rest of the distributions will come from return of capital.   Weekly Distribution History (Roundhill)Interestingly enough, the fund seems to hold up its NAV a bit better than its main competition, QQQY so far. Since this fund's inception, it saw a NAV decay of \"only\" 2.67% whereas its main competitor saw a NAV decay of 12.56% during the same period. Keep in mind that we witnessed the Nasdaq and S&P 500 deliver outsized returns and very strong performance in the last few months, so the NAV decay would likely be higher in a choppier market under more difficult conditions. If these funds are seeing NAV decay under near-perfect conditions, it is likely that they are overpaying, even though one is overpaying more than the other. Data by YChartsOne thing that's been working against this fund lately is the lack of volatility in the markets, even though this might be changing in recent days. Since the summer of 2022, Nasdaq's 30-day rolling volatility dropped from almost 40 to as low as 12 last week, but it's been picking up in recent days to about 16. Since these types of funds harvest volatility in order to generate income, this is basically the bread and butter of this fund. When implied volatility rises (especially to levels above observed volatility), funds that sell options tend to outperform so we might actually see this fund outperform its underlying index if expected or implied volatility continues to pick up. Data by YChartsStill, keep in mind that this fund is making a bullish bet on QQQ. Many times people think that covered call funds are making a neutral bet, but they are actually making a slightly bullish bet. If these funds were making a neutral bet they would have been delta-neutral, and they wouldn't lose much money when their underlying goes down, but this is not the case. If QQQ were to drop by 10% in the next week, you can expect QDTE to drop by about 7-8% during the same period. As a matter of fact, we are seeing it in the current ongoing dip, where both QQQ and QDTE have been dropping in the last 2 weeks or so. Data by YChartsWhat this means is, if you are going to be invested in QDTE, you still have to be slightly bullish on Nasdaq. If you are feeling bearish or neutral towards Nasdaq or if you want to \"park your cash\" somewhere while waiting for a dip to buy, this may not be a good place for you because your money is likely to experience a similar dip to what the markets will experience give or take 2-3%. Many people believe QQQ is overextended. After all it's up more than 80% since the beginning of 2023 and most of this performance has been driven by seven companies also known as the magnificent seven. During this time, the market moved up almost in a straight line without any meaningful pullbacks or corrections with the exception of a mid-sized dip in October of 2023 which was followed by another monster rally for the next 6 months. Now Nasdaq looks overextended, overbought and overvalued by almost every metric and many people feel that it is overdue for a correction. We've seen markets go from overvalued to even more overvalued before, so just because something is overvalued doesn't mean it will crash, but it's also important to be cautious with your hard-earned money. Data by YChartsQDTE can still have a place in your portfolio as long as you know what you are buying. Know that this is a slightly bullish bet on QQQ and that you are likely to underperform when the market is rising. You are basically exchanging upside for income, but you are not completely protected against downside either, even though there might be a slight protection depending on how quickly and orderly the market drops. For example, if the market were to drop 0.2% per day every single day for the rest of the year, it would be down by about 20-22% by Christmas, but this fund would hardly drop since it's selling daily covered calls that collect a premium of about 0.15% to 0.20%. On the other hand, if the market were to drop 20% overnight, the fund would have virtually no protection at all. Another scenario that would look bad for this fund is if the market was super choppy where it rises 2% one day and falls 2% on the next day. This would result in a lot of NAV decay for the fund since it wouldn't participate on those +2% days but mostly participate on those -2% days.  I would put a very small percentage of my portfolio here, maybe anywhere from 1% to 3% but absolutely no more than 5%. You might also want to do a pair trading where you pair it 1 to 1 with a purchase of QQQ so that you get to participate in more upside but this will also reduce your income potential. Also keep in mind that you will likely have to reinvest a significant portion of your distributions back into the ETF in order to maintain your income stable. If you don't reinvest at all, your income levels might drop significantly over time.","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":1,"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/2454143890"}