High dividend yield: QYLD is on our radar

Summary

A ticker has come to our attention recently: The Global X NASDAQ 100 Covered (QYLD). QYLD showed up on our radar because its yields spread against the risk-free rates has surged to a peak level in a decade.  Also, the recent volatility spike reached a level to the top 95% percentile of its historical spectrum, and this can be good news for income generation by option selling.

Front matters

In this article, I wanted to share a ticker that came to our attention recently: The Global X NASDAQ 100 Covered (QYLD). The analysis and our opinion here also apply to many other ETFs or CEFs that follow a similar covered-called strategy. We have not taken any action yet (due to a lack of new capital...lol). As patient investors, we usually set a limit price buy order when/if we want to buy. And you will be the first one to know when we do that. We will update our order alerts on our Blog posts (https://seekingalpha.com/instablog/48844541-envision-research/5783879-watch-list-qyld-is-on-radar ). As usual, we will get to the point quickly and do not hesitate to ask follow-up questions. 

QYLD 

QYLD showed up on our radar because its yields spread against the risk-free rates has surged to a peak level in a decade, as you can see from the charts below.  Currently, it is yielding 16.7% (on a TTM basis), which makes it almost 13% above the 10-year treasury rates (about 3.8% as of this writing). And as you can see from both charts, such a level only happened once in the past decade. 

As such, we feel it is a good fit either for our UTMA account or other retirement account given their tax advantage. It could be a good fit for our survival/withdrawal portfolio too if it is held under a tax-sheltered account. 

Also, the volatility has spiked substantially in the recent a few weeks. Volatility currently hovers around 31.6, compared to 26.5 last month. To provide a broader context, a volatility of 31.6 is at the top 94% percentile of historical volatility. Such a volatility surge could be bad news for equity investors in general, but it can be good news for income investors using the call-writing strategy that QYLD employs. Writing (or selling) calls is like selling anything else in that the amount of the premiums the sell can charge changes as the demand-supply dynamics change. When the market is in panic mode - like in Feb 2020 when COVID first broke out or in the last few weeks - the demand for calls is high, reflected in the so-call implied volatility and the VIX index. And in turn, such high volatility leads to higher premiums for call sellers (i.e., the QYLD fund in this case). That is the main reason why we see the spike in income distribution in 2020. And for this reason, I would also expect a hike in income distribution in the coming months due to the recent VIX spike.

A final word about the downside risks – something you probably already know. On the downside, if the the market (say QQQ) goes up, QYLD’s upside would be limited because of the its use of covered calls.  

If you’d like to see a more detailed analysis of the QYLD or some overseas stock ideas, visit our Shopify Site ( https://envisionret.myshopify.com/ ) for more in-depth reports.

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