QYLD: Probably Beats QQQ In The Months Ahead

seekingalpha2024-09-11
  • The Global X Nasdaq 100 Covered Call ETF (QYLD) aims to generate income by selling call options on Nasdaq 100 stocks.
  • QYLD offers monthly distributions and can provide protection during market downturns, but caps potential gains in strong bull markets.
  • The fund's focus on tech stocks exposes it to sector-specific risks, and its higher expense ratio (0.61%) can impact net returns.
  • Consider QYLD for income and volatility cushioning, but be aware of its growth limitations and tech sector concentration.

Luis Alvarez

Covered call ETFs have been all the rage as of late as investors (and traders) gravitate toward options overlay strategies that can juice yield. You see this now with some single stock ETFs, but clearly there are plenty of funds that do this on an index level. One such fund that does this on the Nasdaq 100 is the Global X Nasdaq 100 Covered Call ETF (NASDAQ:QYLD). This fund aims to mirror the performance of the CBOE NASDAQ-100 BuyWrite V2 Index. This index uses a "buy-write" approach, where the fund purchases stocks in the Nasdaq 100 Index and at the same time writes or sells call options on that index. QYLD's main goal is to generate income through the premiums it gets from selling call options, which can result in higher yields when markets are volatile. QYLD has consistently paid out monthly distributions, which makes it appealing to investors who want regular income.

A Look At The Holdings

QYLD puts money into big-name companies listed on the Nasdaq 100 Index. No surprises here. This of course means that it’s driven by all the large-cap tech stocks you’ve come to know, love, and FOMO on.

globalxetfs.com

Remember – this is a fund about providing yield through selling options. If you don’t care about that, then just go right into the QQQ ETF directly, This fund is meant to give you some added income while still getting you equity exposure to the biggest and most influential tech companies at the top.

Peer Comparison

Since QYLD is the Nasdaq 100 with an options overlay to generate yield (currently at 12.52%), the question to me is how does it stack up from a total return perspective against the Invesco QQQ Trust (QQQ). When we look at the price ratio of QYLD to QQQ, it has underperformed. Why? Because when you constantly sell call options, you get called away in strong bull markets. Selling calls actually limits some of your upside, and this has been a bull market since 2022 with some significant upside. By contrast, notice how the ratio has started to trend higher since July. This was the local top for the Nasdaq, and in this case, the selling of call options has actually resulted in outperformance by being down less than QQQ. The real takeaway here is that the decision of which to choose should less be about yield and more about up capture vs. down capture and broader market volatility potential.

stockcharts.com

Pros and Cons

On the plus side? The fund's covered call approach can boost income through option premiums, which helps when markets get shaky. This method also gives some protection when stocks fall, as the premiums can help cover potential losses. What's more, QYLD pays out steadily on a monthly basis, which some investors love to see to pay for personal expenses without having to sell the position to raise cash.

But there are downsides to think about. The covered call strategy puts a cap on potential gains, since the fund might lose out if the Nasdaq 100 Index jumps way above the call option's strike price. Also, the fund's big focus on the tech sector means it's open to risks specific to that area. And let’s face it – tech is highly extended and due for some mean reversion of its own. Investors should keep in mind that this fund has a higher expense ratio of 0.61% as well, which can affect net returns over time.

Conclusion

Would I consider this fund? Maybe – but not for yield because total return is what matters, and that includes both income and capital appreciation. There’s nothing wrong with the Global X Nasdaq 100 Covered Call ETF. It offers a different way to invest for people who want income through a covered call approach. It zeroes in on the Nasdaq 100 Index, giving investors a stake in top tech firms, while the money from options might help cushion against market ups and downs. But keep in mind the fund's capped growth potential and focus on one sector are big factors to think about. I think it has a good chance to outperform QQQ in the months ahead, but little else as tech selling pressure potentially accelerates.

Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.

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