SPY - QYLG: QQQX Switch Trade Done Now Time For ETB

2023-08-08 10:00:00 ET

Summary

• Our trade suggestion made at the beginning of the year involved selling Nuveen NASDAQ 100 Dynamic Overwrite Fund and buying Global X Nasdaq 100 Covered Call & Growth ETF.
• QYLG outperformed QQQX, with a return of 23.65% compared to 10.11%.
• We tell you why that happened and why we are now suggesting a third fund.

The markets present us with countless opportunities every single day. Each one has a different set of risk and reward. We tend to focus on those that give you an abnormal bang for your buck. Some of these may simply sell and get out of a horrendous investment before the curtain falls (think bonds in 2021). In other cases, we offer ideas to maintain a similar exposure with far less risk. We look at one such trade we had suggested at the beginning of the year and tell you why we are done with it. We also suggest another switch for the daring.

The Funds

The funds where we had suggested were Nuveen NASDAQ 100 Dynamic Overwrite Fund ( QQQX ) and Global X Nasdaq 100 Covered Call & Growth ETF ( QYLG ). The two funds are both covered call funds, designed to generate income. Both funds follow a rather passive covered call selling tactic and don't use active management to try and squeeze extra juice. QQQX is definitely a bit more liquid but the relative setup for this was horrendous back in January. We saw the problem and wrote that you needed to get out of dodge, which in this case was QQQX.

Both come with a hefty distribution but QYLG's is smaller (6.67% on trailing 12 months vs 8.75% for QQQX). But since QYLG is an ETF, you don't get dinged the extra 10% premium.

Hence our logic here is, if you really want the covered call format and you choose to have it on the most expensive index, you might as well not pay a 10% premium. So selling QQQX and buying QYLG makes sense.

Source: A Switch To QYLG Makes Sense

So what happened? Well, you got your free alpha with this simple trade. QYLG did 23.65% versus 10.11% for QQQX.

Let's get to the "why" part next.

Above we have shown the total return based on price . So now let us look at total return on NAV.

Very different picture, is it not? The two are almost hugging each other. The reason is that the funds are designed to basically do the same thing. Yes, there is slippage here and slippage there. One might do something better out of chance, but on the whole, these are two peas in a pod. So NAV return is almost identical. But QQQX is a closed end fund while QYLG is an exchange traded fund. QQQX was expensive, in fact extremely expensive for such a passive strategy fund. As shown above, it was trading at a premium of 10% at the time of the last article. Today? Premium has vanished and there is now a small discount.

So in essence the performance difference has come from the 12.5% delta as the fund went from a 10% premium to a 2.5% discount.

Outlook For the Two

Both funds have almost identical top holdings. Below are QYLG's which include Apple Inc. ( AAPL ), Microsoft Corp. ( MSFT ), Tesla, Inc. ( TSLA ), and Adobe Inc. ( ADBE ).

For QQQX you can find a similar set but do note the percentage differences. This comes primarily from the two data sets coming in on different dates.

Option coverage and days to expiration tends to be similar for both funds as well, though you have to pick both at quarter end to see this in real-time.

We will note that QQQX sells individual call options on single stocks, whereas QYLG does so only on the index.

But the impact is almost identical in the long run. One reason that QYLG could not sell calls on individual stocks is that the fund is really small.

At present, we think the forward performance for both should be very similar, and we expect both to post negative total returns. The options used have very little premium and tend to not protect very much on the downside. Assuming you did sell QQQX and bought QYLG when we last suggested, your best trade would be to reverse thrusters and go the other way. Why? Well, you are now getting QQQX at a small discount whereas QYLG, as it is an ETF, trades right next to NAV. QQQX is also way more liquid, and if you want a longer-term holding, QQQX now makes better sense.

The Real Good Choice Today

So far, everything we have talked about has a very high relative reward and very low risk. It was almost impossible to really get punished for switching between QQQX and QYLG when the former was trading at a 10% premium. But for the next leg of the journey, investors could consider something that has a more moderate risk-reward. Here we are talking about just ditching the NASDAQ 100 exposure and moving to a more defensive option. One fund we have recently covered is the Eaton Vance Tax-Managed Buy-Write Income ( ETB ) which also does covered calls. You can read that article for more details, but the fund tends to use more option premium to enhance defensiveness. It is also tethered to the S&P 500 ( SPY ) index rather than to the NASDAQ. We think both items should enhance returns over the next 6 months relative to QYLG and QQQX. Finally, the fund is at a sweet 5.29% discount. Compare that to what happened in 2022 when investors went stark mad and paid as much as a 21.42% premium for this fund!

So move from QYLG to ETB and don't look back.

Please note that this is not financial advice. It may seem like it, sound like it, but surprisingly, it is not. Investors are expected to do their own due diligence and consult with a professional who knows their objectives and constraints.

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