QYLD - QYLD: Recent Income Levels Are Likely To Fall Significantly

2023-08-29 04:37:04 ET

Summary

• The Global X NASDAQ 100 Covered Call ETF has seen increased capital allocation and impressive income returns over the past 5 years.
• However, the fund's income payouts are expected to decrease due to lower volatility levels, making it less appealing in the current market environment.
• Alternative income investments, such as Chevron and Pioneer Natural Resources, may offer better dividends and total returns in the current market.

The best investing strategies of the future aren't always the best choices in the past. While index investing was the most successful way for most income and growth investors to achieve long-term objectives for the last two decades, markets have become more complicated since Covid hit in 2020.

One exchange trade fund that has increasingly gotten more capital since the ETF's inception in late 2013 is the Global X NASDAQ 100 Covered Call ETF ( QYLD ).

QYLD is an income focused investment, so looking at price movement alone without including total returns is meaningless. This fund has returned decent income over the last 5 years. QYLD has offered investors returns of 22.93% over the last 5 years. The S&P 500 has offered investors total returns of 65.13% during this same time period.

I last wrote about the Global X Nasdaq 100 covered call ETF in March of this year. I rated the fund a buy because of the income I was confident the fund would be able to payout in a market with heightened levels volatility. Today, I am downgrading my rating of this fund to hold. While I expect QYLD to continue to offer decent payouts, the income this fund pays out should drop significantly in coming quarters from previous levels because volatility levels are likely to continue to be lower. There are also more appealing income investments that should offer better payouts moving forward in the current market environment.

The Global X Nasdaq 100 Covered Call ETF fund has an expense ratio of .60%, $8.01 billion in assets under management, and a current trailing yield of 9.84%. This fund is indexed to the Nasdaq 100. This ETF's holdings are 49.33% technology, 15.48% communication, 13.78% consumer cyclical, 7.33% health care, 6.46% consumer defensives, 4.96% industrials, 1.26% Utilities, .58% financials, .54% energy, and .28% real estate. The two largest holdings of this fund are Apple (AAPL) and Microsoft (MSFT), those two stocks makeup a combined 21% of the fund. The Global X Nasdaq Covered Call Fund makes monthly payouts.

Even though the Global X NASDAQ 100 Covered Call ETF is down nearly 35% over the last 5 years, the purpose of this exchange traded fund is to use pay income, and this investment has been very successful at paying out consistent and significant dividends since this exchange traded fund's inception in late 2013. The average annual dividend of this fund over the last 4 years has been an 12.2%.

QYLD writes at the money calls against 100% of the fund's portfolio each money, and uses the money from calls as well as dividends paid out by the underlying holdings to make the monthly payouts. The primary purpose of this fund is to pay out income, since this ETF is selling off the upside of the holdings without downside protection, this investment will never offer the same capital gains as traditional funds over the long-term. The best indication of what this fund is likely to be able to payout is to look at the implied volatility premiums in the monthly options this ETF sells. The VIX is the best indication of what level these premiums are likely to be at.

The VIX is currently at the lowest levels seen since 2020 for a number of reasons, and volatility levels are also likely to continue to fall. Inflation levels been decreasing for 11 of the last 12 months, the current 3.2% rate of price increases is barely above the Fed's 2% target. The current rate cycle is likely coming to an end. The economy also looks likely to be able to avoid a deeper recession since unemployment levels remain low, personal savings levels remain respectable, and the rate of the current slowdown has been very gradual. QYLD paid out much less income in 2017 when the VIX was at a lower level.

This fund paid out less than $.15 a month in all but 2 months of 2017 when the VIX was at the lowest rates seen in a decade.

While a wider than expected recession or inflation levels accelerating would likely lead to volatility levels increasing, uncertainty and fear levels continue to come down. The dollar has also pulled back this year against the Euro and most major currencies, which has helped many of the large cap tech holdings that makeup a large concentration of this fund.

This is why alternative income investments that don't rely as heavily on volatility levels should offer better dividends and total returns in the current market environment. Companies such as Chevron ( CVX ) and Pioneer Natural Resources Company ( PXD ) are seeing historically high levels of cash flow, and these companies are also committed to maximizing shareholder returns as well. Oil prices have also held up very well even during the recent slowdown, with the current price of Brent Crude oil being $84.45 a barrel.

Investors have different goals and there isn't just one way to correctly allocate capital. Still, even long-term investing strategies should evolve as market conditions change. Past results aren't always indicative of future performance. In today's market, income investors who have done well in covered call funds such as QYLD should be to find more stable dividends as well as better overall returns in alternative investments.

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