SPY - QYLD: 12% Yield Monthly Payer And Outperforming Alternatives

2023-06-25 09:15:00 ET

Summary

• The Global X NASDAQ 100 Covered Call ETF writes covered calls on the NASDAQ 100.
• It pays monthly and yields over 12%.
• This article analyzes other covered call NASDAQ-related funds that are outperforming the QYLD ETF.

After taking a drubbing in 2022, Tech is back in investors' good graces, which means the tech-heavy NASDAQ 100-Index (NDX) is outperforming the S&P 500 (SP500) and the Dow (DJI) by wide margins in 2023.

The Invesco QQQ ETF (QQQ), which tracks the NASDAQ 100, is up ~37%, vs. 13.7% for the SPDR® S&P 500 Trust ETF (SPY), and 2% for the SPDR® Dow Jones Industrial Average ETF Trust (DIA):

Unfortunately for income investors, Tech doesn't offer very attractive dividend yields, so many investors seek to solve this problem via investing in NASDAQ-based funds which offer higher yields. These funds usually accomplish those higher yields through selling covered call options.

The Global X NASDAQ 100 Covered Call ETF (QYLD), the Nuveen Nasdaq 100 Dynamic Overwrite Fund (QQQX), and a younger fund, the Global X Nasdaq 100 Covered Call & Growth ETF (QYLG), all use covered calls to create income.

The trick with covered calls is knowing when to use them. While timing the market is very difficult, if you want to gain some downside protection for your holdings in a down market, such as we had in 2022, selling covered calls can help. The flip side is that this strategy limits your upside potential, so using it in a bull market can be a disadvantage.

Fund Profiles:

QYLD seeks to generate income through covered call writing, which historically produces higher yields in periods of volatility. The fund seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the Cboe Nasdaq-100 BuyWrite V2 Index. It pays monthly distributions.

QQQX is a CEF, or closed-end fund, which seeks to invest in stocks of companies operating across diversified sectors. It primarily invests in the stocks of large-cap companies. The fund also invests through index call options. It seeks to replicate the performance of its portfolio against the NASDAQ 100 Index. It pays quarterly distributions.

QYLG also writes at-the-money index call options on the Nasdaq 100. It invests at least 80% of its total assets in the securities of the underlying Cboe Nasdaq-100 BuyWrite V2 Index.

QQQX has 176 holdings, vs. 103 for QYLD and QYLG. Management writes covered calls on 35 to 75% of the fund's holdings, with a long term target of 55%.

QYLD and QYLG are both run by Global X, The big difference between the 2 funds is that QYLD has 100% of its portfolio covered by call options, whereas QYLG only has 50% of its portfolio covered.

Dividends:

QYLD has by far the highest yield of the 3 funds, at ~12%, vs. 6.8% for QQQX and ~6% for QYLG. QYLD and QYLG should both go ex-dividend for their next monthly distribution on ~7/18/23, with a ~7/26/23 pay date. QYLD has a 5-year distribution growth rate of 5.34%.

QQQX pays a quarterly distribution, which decreased from $.4934 to $.42 in Q1 '23. after rising in 2022. It goes ex-dividend for their next monthly distribution on ~9/14/23, with a ~10/3/23 pay date.

Taxes:

QYLD's 2023 monthly distributions have been comprised of 96.22% Return of Capital, which can be a 2-edged sword - ROC gives you a tax deferral advantage, but it also decreases your tax basis, so that there's a higher profit when and if you sell your shares.

QYLG's 2023 payouts have been very similar in nature, with 92.95% ROC, and 7% NII:

QQQX's 2022 distributions were characterized as 34.9% long term capital gains, 59.4% short term capital gains, 0.6% NII, and 5.1% ROC.

Its Q1 '23 distribution is estimated to contain 72.6% long term capital gain, 24.7% short term capital gain, 2.7% NII, and no ROC:

Holdings:

QYLD and QYLG have virtually the same sector exposures, with Tech at 52.7%, followed by Communication Services, at 17%, and Consumer Discretionary, at 14.9% forming 84.6% of the portfolio.

QYLD and QYLG also have the same top 10 holdings, with large cap tech names such as Microsoft (MSFT), Apple (AAPL), and the resurgent NVIDIA (NVDA), which form ~60% of their portfolios:

QQQX's top 5 industries were Software, at 20%, Semi's, at 14%, Tech Hardware & Storage/Peripherals, at 14%, Interactive Media & Services, at 13.4%, and Broadline Retail, at 7.7%. These top 5 formed ~69% of QQQ's portfolio, as of 5/31/23:

QQQX's top 10 also includes Comcast (CMCSA) and Cisco (CSCO), vs. Broadcom (AVGO) and PepsiCo (PEP) in QYLD and QYLG's top 10.

Performance:

Unsurprisingly, with big cap Tech and the NASDAQ booming again, QYLD's 100% covered call policy has caused it to underperform QQQX and QYLG, which have had a total return of ~22% and ~21% over the past year, respectively, vs. ~13% for QYLD.

So far in 2023, QYLG leads the group, with a 23.5% price return, vs. 22.8% for QQQX, and 10.24% for QYLD.

Looking back further, QQQX has outperformed QYLD on an NAV and market price basis over the past 3 and 5 year periods, and both QYLG and QQQX have outperformed QYLD since inception:

Valuations:

While ETFs track their NAV's closely, CEFs often trade at premiums and discounts. The daily NAV is calculated at the close of trading. Buying a CEF at a Price/NAV which is lower than its historical averages can be a useful strategy, due to mean reversion.

In QQQX's case, its 6/22/23 Price/NAV was 2.95%, which is lower than its 4.87% 1-year average, but higher than its 3- and 5-year averages:

Parting Thoughts:

Moving forward, your choice is directional - which way do you think the NASDAQ will go for the rest of 2023?

In a continuing rally you would benefit from QYLG and QQQX, which have lower covered call %s, whereas in a pullback, QYLD would offer the most downside protection.

All tables furnished by Hidden Dividend Stocks Plus, unless otherwise noted.

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