QQQX - Sell QYLD Buy QQQX

2023-10-24 07:59:12 ET

Summary

• QYLD and QQQX are popular vehicles for exposure to NASDAQ 100 with a twist of income generation.
• While covered call funds are all considered the same, we prefer those without a blind option writing strategy.
• QQQX also has an extra point in its favor and we would consider a switch for those holding QYLD.

We have covered Nuveen NASDAQ 100 Dynamic Overwrite Fund ( QQQX ) a couple of times this year. The first coverage of 2023 was in January , where we suggested a switch from QQQX to Global X Nasdaq 100 Covered Call & Growth ETF ( QYLG ). That trade worked out with QLYG beating the QQQX total return by double digits by the time we wrote a follow up piece in August. By that time, the QQQX premium had given way to a discount and we thought it time to close the QYLG trade.

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.

Source: QYLG: QQQX Switch Trade Done, Now Time For ETB

Today, we are going back to QQQX and comparing it with yet another fund. This time an exchange traded one, Global X Nasdaq 100 Covered Call ETF ( QYLD ).

The Funds

QQQX is a closed end fund that started in 2007 and at last count had around $1.1 billion in assets . It aims to provide a solid total return to its investors by investing in a portfolio of equities that help it replicate the performance of the Nasdaq 100 Index ( NDX ). While it has the leeway to step outside of the index in its quest to achieve this goal, it primarily holds index components. Additionally, the fund also writes calls on an average of 55% of the notional value of the equity portfolio. The covered calls are a vehicle to stem the volatility that comes with holding the equities portfolio. On the flipside, the options also put a cap on the gains that may come from the price appreciation of the equities. At September 30, the date of the last published holdings report, QQQX had only written calls on indices and not on individual names.

The calls held at the time were all monthlies, with the average strike out of the money, as reflected in the average call strike vs. spot price of 101% below.

The 19.68 weighted average days to maturity also indicates that most of these options were monthlies, expiring on the third Friday of the following month. QQQX has also hedged its positions in the past by buying call options on the Volatility Index, or VIX. So in a way, QQQX goes a bit different route than the regular covered call fund. At the end of last month, QQQX had around 252 holdings, with a top 10 list that would make any Nasdaq aficionado beam with pleasure. The fund has over 40% of its total holdings spread across Apple Inc. ( AAPL ), Microsoft Corp. ( MSFT ), AmazonCom. Inc. ( AMZN ), Alphabet Inc. ( GOOG ) and of course the AI phenom, NVIDIA Corp ( NVDA ).

QYLD began operations a few years later, in 2013 and being a successful ETF, is bigger with around $7.6 billion in net assets . This ETF's strategy is slightly simpler, in the sense that its world starts with and ends with the Nasdaq 100 Index. It buys stocks from within the index and sells covered calls on the one index.

The goal of this endeavor is to provide returns that "correspond generally to the price and yield performance, before fees and expenses, of the Cboe Nasdaq -100 BuyWrite V2 Index". QYLD sells at the money calls on the index, up to 100% of the value of the equity portfolio. At the money calls, take away 100% of the upside participation, and it is noted as much on the fund website .

Unlike QQQX, this ETF is not a buyer of options, and hence takes all the downside risk of the index on the chin. The overarching goal is to earn income to deliver monthly distributions to its unitholders. The top 10 list of the two funds have a lot of overlap, but that is to be expected, as they drink from the same pot.

Distributions

QQQX makes quarterly distributions and the amount remains consistent during the year. In order words, the fund has managed distributions.

QQQX yields around 8.05% on price ($20.86) and around 7.39% on net asset value or NAV ($22.72). QYLD on the other hand has a monthly distribution, which common to most ETF's varies based on the net income earned. Using the last payout of 17.19 cents and the current price of $16.61, this ETF currently yields a whopping 12.41%.

Performance

QQQX measures its performance versus a blended index, namely, 55% Chicago Board Options Exchange ( CBOE ) Nasdaq 100 BuyWrite Index and 45% Nasdaq 100 ® Index. The most recent performance comparison with the index is up to June 30, 2023.

We can see that, at least until June of this year, this fund held its own versus the index, especially when we take into account that the fund has expenses (annual around 0.92%) unlike the indices, which have none.

QYLD, as noted earlier in this piece, benchmarks to CBOE Nasdaq -100 BuyWrite V2 Index. The expenses are lower than QQQX, but that is expected with it being an ETF. Investors bear 0.60% in annual expenses for holding this fund. This one too has held up well, after accounting for expenses.

In comparison with each other, with respect to total return on NAV, QQQX as come out well ahead over the last five years.

The gap has closed up over the last year however, with both making the downward journey.

Why Sell QYLD And Buy QQQX?

Blind covered call selling is an inherently problematic strategy and QYLD delivers this in spades. We have also seen this in the sister fund, Global X Russell 2000 Covered Call ETF ( RYLD ), which has delivered about less than 2% annually, despite boasting of 16-20% annual yields.

The key point is that the price keeps depreciating.

QQQX has a more nuanced approach to selling calls and since it sells it only on about half the holdings, it is less whipsawed in the markets. That gives it enough of a long term advantage.

But the key reason we like QQQX here over QYLD is that you get an extra boost here as QQQX is trading at big discount to NAV.

This is the opposite end of the situation we had presented in our previous article comparing QQQX to QYLG. Even the 1 year Z-score is very favorable at negative 2.47.

QQQX represents a solid alpha opportunity over QYLD and we would consider a switch.

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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