QYLD - QYLD: New Year And More Distributable Income To Be Generated

2024-01-01 09:00:00 ET

Summary

• QYLD, a covered call ETF, generated a 9.33% appreciation in 2023 and distributed $2.04 per share of income.
• QYLD's strategy focuses on generating immediate income through covered calls, rather than capital appreciation.
• QYLD has a track record of 120 consecutive months of monthly distributions and is part of an income-producing portfolio strategy.

2023 has come to an end, and a new year is upon us. After declining by -19.44% in 2022, the S&P 500 climbed 24.73% in 2023. The Nasdaq had an even steeper spread as it fell -33.10% in 2022, then rebounded by 44.52% in 2023. The investment community seems to have a love-hate relationship with the Global X Nasdaq 100 Covered Call ETF ( QYLD ), as the idea of income investing rubs many individuals the wrong way. Income investing isn't the right strategy for everyone, but it is applicable to certain strategies. The debate between investing for capital appreciation rather than income will continue to be discussed for decades to come, but the aspect to remember is that every investor's situation is different, which can create different investment objectives. I am a big fan of index investing and have 100% of my 401k in a standard S&P index fund. My objectives are different than the next investors, and just because generating income from a portion of my invested capital fits my needs, it may not be the correct approach for another individual. Coming off a terrible 2022, QYLD has appreciated by 9.33% in 2023 and generated $2.04 per share of distributed income. QYLD started the year at $15.86, so investors who added QYLD at the beginning of 2023 generated a 12.88% yield on capital and watched the underlying investment grow by 9.33%. QYLD doesn't work out like this every year, but its strategy allows it to generate an ongoing stream of income for its investors without having to sell off shares to generate income. While there have been new high-yield investment products introduced to the market that I am invested in, I am still a fan of QYLD.

Following up on my previous article about QYLD

On October 17th, I wrote an article on QYLD ( can be read here ), which compared QYLD to the Global X S&P 500 Covered Call ETF ( XYLD ) and the Global X Russell 2000 Covered Call ETF ( RYLD ) on a YTD basis. I also discussed why I was bullish on QYLD going into the end of 2023 and how I felt the economy was set up well for its underlying assets. I wanted to follow up on that article, take a look at QYLD's 2023 performance, and discuss why I prefer the idea of holding a portfolio of income-producing assets to generate income rather than utilizing an approach where I sell off shares of an investment.

2023 was a good year for the markets, and QYLD delivered on its objectives

QYLD is not constructed to replicate the performance of the Nasdaq. If your investment objective is capital appreciation, then QYLD probably isn't going to be an enticing investment choice. QYLD has constructed its underlying assets by investing in the companies that make up the Nasdaq 100. Its main focus is to generate immediate income on a monthly basis by writing covered calls against its positions. Capital appreciation is a much distant secondary objective as much of the upside is exchanged for immediate income when the covered calls are written. Much of the potential upside is capped in an appreciating market due to QYLD writing one-month call options on the Nasdaq 100 index that are covered by the securities within its portfolio. 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. This is why in 2023, when the S&P increased by 24.73% and the Nasdaq appreciated by 44.52%, QYLD appreciated by only 9.33% when it held many of the same companies.

QYLD didn't outperform the markets on an appreciation basis, but it delivered on its primary objective of generating immediate income and its secondary objective of generating capital appreciation. QYLD utilized its strategy of writing covered calls against its positions on a monthly basis to generate $2.04 of annualized income in 2023 with an average monthly distribution of $0.17 per share. By investing in QYLD, investors were able to generate a trailing twelve-month ((TTM)) distribution yield based on today's share price without having to sell a single share. QYLD appreciated by 9.33% as the markets appreciated, and investors still have the entire share base to continue producing income in the future. This method may not fit everyone's investment preferences, but it's an effective method for generating income as utilizing the option market for selling covered calls eliminates the need to manufacture income solely from generating dividend income.

While QYLD delivered on its objectives in 2023, it also added another year to its distribution history. Since its inception, QYLD has distributed income to its shareholders for the past 120 months. QYLD went public on 12/16/13 at $25 per share, and since then, shares have distributed $23.31 to its investors through the monthly distributions. QYLD has effectively generated 93.25% of its initial share price in distributed income if the distributions were taken as cash rather than being reinvested. Since its inception price of $25, shares of QYLD have declined -30.64% (-$7.66) to $17.34, but the current value of the distributed income and today's share price is $40.65 which is an ROI of $15.65 or 62.61% on its initial share value.

Why I allocate capital toward income-producing assets and prefer the idea of generating income from distributions or dividends rather than selling shares to manufacture income

I have a hybrid approach toward investing, and while it may not work for some investors, it works for me. Outside of retirement accounts, I allocate capital toward a basket of ETFs, big tech, growth stocks, and income-producing equities. I am building out a stream of income through income-producing equities, ETFs, and CEFs that I hope will cover my living expenses when I retire without having to touch my other investments. I would rather have a stream of diversified income being generated than relying on selling shares to generate income because the markets are unpredictable, and too many things are out of our control. We can't control market dynamics, macroeconomic factors, or geopolitical tensions. If you had purchased 1,000 shares of QYLD at its inception at the end of 2013 and also purchased $25,000 of QQQ and sold shares of QQQ to replicate the income QYLD generated on an annual basis, the investment in QQQ would have done better so far. I am not disputing that fact at all. The main concern that I have is that we haven't had 2 consecutive negative years in the Nasdaq since 2001, and eventually, it is bound to happen again. While it's infrequent, since 1972, we have had 2 negative years in the Nasdaq: 1973 and 1974, then 2000 and 2001, and again in 2001 and 2002.

Fortunately, we have experienced a lot of bull cycles, and in recent years, the Nasdaq was positive from 2012 - 2017 and again from 2019 - 2021. Appreciating markets have mitigated the amount of shares that have been needed to sell to manufacture an individual's desired income, but we haven't had to draw down on assets over 2 or more negative years since 2001. The main reason I would rather build out a stream of income that isn't based on selling assets is that I can't time the markets, and there are factors outside of my control that impact markets. While it's unlikely based on decades of data, there will probably come a time when we have at least 2 consecutive down years or maybe more. When markets decline, more shares need to be sold to generate the same amount of income than when the markets are flat or appreciating. I don't want to be in a position where I must draw down on assets during multiple years of negative gains to generate income. I would rather have a basket of assets that are producing ongoing income during a downturn. If you have income-producing assets that generate income without having to sell shares, then you won't have to worry about running out of shares to sell to produce the income. QYLD has proven that it can generate double-digit yields on an annual basis, and this is why it's part of my income-producing portfolio. The share price can fluctuate, and currently, shares have declined, but my share count isn't declining, in fact it's increasing because all the income I am producing is being reinvested to generate more forward income on a monthly basis.

Risk to investing in QYLD

While I utilize QYLD as a component of an income-producing strategy, there are risks to the investment. Since QYLD sells covered calls, your risking underperforming the market as its upside potential is capped. QYLD will follow the Nasdaq on the way down, and while it could generate additional income due to volatility, it won't share in the upside to the share extent. The amount of income generated fluctuates, and investors can't rely on a certain amount of income being generated monthly.

Conclusion

All investing strategies are different, and QYLD is geared toward investors that are focused on income production. I am bullish on QYLD as a component of an income production strategy as it produced 120 consecutive months of monthly distributions. QYLD isn't predicated on dividend harvesting to generate income, and its covered call strategy has been effective during different market cycles and macroeconomic conditions. Shares of QYLD bounced off their 2022 lows, and I think 2024 will be similar to 2023 for QYLD. I am expecting it to appreciate in the mid to high single digits while generating a low double-digit yield.

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