XYLD - QYLD: 11.89% Yield And Outperforming XYLD And RYLD In 2023

2023-10-17 09:00:00 ET

Summary

• QYLD, a covered-call strategy ETF, has outperformed XYLD and RYLD in terms of ROI and yield in 2023.
• QYLD has gradually climbed higher in 2023 after a rough 2022, while XYLD and RYLD have trailed behind.
• The economic landscape suggests a bullish 2024 and 2025, which could lead to QYLD moving higher and generating attractive yields.

Seeking Alpha readers have a love-hate relationship with the Global X Nasdaq 100 Covered Call ETF ( QYLD ) based on the comment section of my previous articles. QYLD is purely an income investment, and in the past, it has trailed the Global X S&P 500 Covered Call ETF ( XYLD ) and Global X Russell 2000 Covered Call ETF ( RYLD ) on a return basis. In 2023, however, QYLD is outperforming both XYLD and RYLD when looking at it from a ROI perspective on share price and the total return when distributions are accounted for. Since its inception, shares of QYLD have declined by almost a third of their value but have almost distributed enough income to equal its initial share price. Income investing isn't for everyone, and utilizing covered-call strategy ETFs isn't an optimal strategy for all investors. The covered-call ETFs from Global X focus on generating a continuous stream of income and not maximizing capital appreciation. Prior to investing in QYLD, investors should understand the methodology as to how its income is generated and what the investment premise is and make sure that the risk falls within their investment model. Other firms have created similar funds that have modified the approach Global X has taken. While I have ventured into other high-income strategies, I am still invested in QYLD and think it can grow higher in 2024 while generating attractive yields.

Recapping my previous article and discussing why I am following up on this idea

In my previous article on QYLD ( can be read here ) I discussed how I write covered calls on some positions I own to generate income, the premise behind covered-call ETFs, why I was a fan of QYLD for income, and why I felt it could move higher. QYLD generates double-digit yields by purchasing the underlying assets in the Nasdaq 100 and utilizing a buy-write covered-call strategy. Each month, QYLD will write or sell one-month call options on the Nasdaq 100 index, which are covered since QYLD holds the securities underlying the options written. Each option written will generally have an exercise price at or above the prevailing market price of the Nasdaq 100 index from when it was written, creating immediate income for QYLD. Since QYLD generates the majority of its income from the premiums it collects on its call options, it is not dependent on dividend harvesting to generate income for its distributions. I am following up on this idea because a significant amount of data has occurred on the macroeconomic level, and I wanted to take a fresh look at how QYLD is doing compared to XYLD and RYLD.

2023 has been a good year for QYLD compared to XYLD and RYLD

The overall performance for QYLD on an appreciation basis has been dismal over the past five years. QYLD had a rough 2022 after spending the majority of 2021 above the $20 level. Shares went sub-$16, and QYLD wasn't as strong as XYLD or RYLD from an investment perspective. Things are looking different in 2023, and while QYLD does cap its upside potential, it has been gradually climbing higher from its lows. Below, I constructed three tables that outline investments in QYLD , RYLD , and XYLD since the beginning of 2023. I looked at the initial share price, the share price on the distribution date, the distributions per share, and the monthly distribution from 100 shares.

After analyzing the data, QYLD has pulled ahead of XYLD and RYLD on a performance basis in 2023. QYLD has outpaced XYLD and RYLD in ROI on the initial investment, the yield its distributions have paid YTD, and the total ROI when appreciation and distributions are combined. An initial investment of $1,586 on 1/3/23 would have purchased 100 shares of QYLD. The initial appreciation alone is 8.01% YTD, and QYLD has generated $154.87 in distributions in the first nine months, which is a 9.76% yield on investment. When the $127 of appreciation and $154.87 of distributions are combined, QYLD has a total return of $281.87 or 17.77% on an investment of 100 shares. Looking back to what QYLD paid in distributions for October, November, and December of 2022, its future annual distributions based on the TTM is $2.04 per share, which is a 12.86% yield on the initial investment at the beginning of 2023.

XYLD and RYLD are trailing in every category except future yield on investment. The total ROI in 2023 for RYLD is -4.38%, while XYLD has a total ROI of 8.14%. This is an interesting turn of events as these have performed better than QYLD in previous years. RYLD has seen a steep decline in share price as an initial investment in 2023 has declined by -12.92%, which has pushed its forward yield to 14.65% based on an initial investment in the beginning of 2023. I am invested in all three funds, and while QYLD hasn't performed as well as RYLD and XYLD in the past, it's in the lead, coming into the home stretch in 2023.

The economic landscape is setting up for a bullish 2024 and 2025 which could lead to QYLD moving higher

We just received inflation numbers for September, and CPI has remained under 4%, while Core CPI has fallen for six consecutive months to 4.1%. At the last FOMC meeting, the Fed held rates at 5.25-5.50%, and Jerome Powell was very clear in his speech that rates would be higher for longer, and the possibility of a Fed pivot in 2023 was basically non-existent. Economists and financial pundits had debated what the Fed should do and what they were going to do throughout the year, and everyone finally got the message that the Fed wasn't cutting in 2023. Jerome Powell's speech on September 20 ( can be watched here ) rocked the Nasdaq as it fell from 13,712.38 at the open on September 20 to 13,469,13 at the close and continued downward for the next week, reaching 12,993.03 on September 27.

Rates have been restrictive for most of the market, and most of the rally in 2023 is because of the Magnificent Seven. The St. Louis Fed and CME Group are both projecting that the Fed will pivot in 2024. The St. Louis Fed is projecting that rates will get to 5.1% in 2024 and 3.9% in 2025. CME Group has projected through its Fed Watch Tool that the highest probability is that rates will finish at 450-475 bps at the end of 2024, with a 32.6% chance rates could fall under this level. The first time that CME Group even factors in a Fed pivot is in March of 2024, with a 16.7% chance a 25 bps decline occurs.

The ST. Louis Fed has disclosed that $5.92 trillion was parked in money market accounts at the end of Q2 2023. The risk-free rate of return has reached its highest point since 2000 regarding 12-month treasuries , and there are several savings, CD, and money market accounts that exceed a 5% yield. For some investors, there is too much uncertainty due to the macroeconomic environment and geopolitical tensions, and earning above 5% risk-free doesn't seem like a bad idea while waiting for clearer skies. When rates were under 1% these vehicles weren't appealing to the majority of investors, but now CD and bond ladders have become increasingly popular. Until the Fed pivots and cuts rates back a significant amount, these risk-free investments will be a viable option rather than parking capital in the market.

When rates become restrictive, the cost of capital increases, and business expansion typically declines. In an environment where the Fed is pivoting the inverse occurs, and businesses are more likely to expand operations and take on debt at a lower cost. This creates a stronger business environment as more activity occurs, and the economy often sees additional output. Companies in the market also thrive because many find themselves on the opposite end of the transactions from other companies expanding. When rates decline, risk-free assets also take a hit as the risk-free rate of return declines, and these investments are less attractive. I think the market is setting up for a multi-year bull cycle, and the companies within the Nasdaq will be direct beneficiaries. This should allow QYLD to continue moving higher while generating larger-than-average income over the next several years.

Why I am still holding QYLD

My reasons for investing in QYLD are probably different than many others. Someone told me that the reason they don't invest in dividend stocks or income-focused ETFs is because there isn't enough of the S&P 500 that they can buy. I respect that and understand the logic from a long-term perspective, and I will never say that allocating capital toward an S&P 500 index fund isn't a good idea.

100% of my 401K and 100% of my wife's 401K is allocated toward an S&P 500 index fund and a target date fund. We also have investments outside of retirement accounts in S&P 500 funds and total market funds. I don't want all my exposure in one basket, and I have been building out a diversified income-producing portfolio to act as an income-producing vehicle in retirement.

QYLD has never missed a distribution, and the fact is that since its inception, it has paid $22.82 per share in income, which is 91.27% of its IPO price. Without accounting for compounding, if you had purchased shares at the IPO for $25, your initial investment would have declined by -31.48%, but you would have gained 91.27% in income for a net ROI of 59.79%. If you had reinvested each distribution along the way, these statistics would be very different. In another year, investors will have generated their entire initial investment in distributed income and still have an income-producing asset spinning off capital monthly. I am looking at QYLD as an income-producing vehicle, nothing more, nothing less, and this is an investment that will continue generating monthly distributions for decades.

Conclusion

If you're not focused on producing income, then QYLD isn't going to be a good fit for you. Capital appreciation is a secondary objective, while producing income is QYLD's main focus. If this article got you interested in QYLD, I would suggest doing more research and mapping out how QYLD will fit into your investment strategy before pulling the trigger, as my reasons for investing are probably different than those of other investors. Overall, I think that the markets are setting up for a strong 2024 and 2025 and that QYLD will follow the markets higher if this outcome occurs. I plan on holding QYLD and reinvesting each distribution along the way.

For further details see: