2023-03-17 09:00:00 ET
Summary
- QYLD has established a track record of more than 9 years for paying monthly distributions.
- QYLD continues to disprove the bear case about larger volatility as shares are keeping pace with SPY and QQQ in the short term.
- QYLD utilises covered calls to generate monthly income and since inception has generated 86.44% of its initial share price in monthly distributions.
A lot has occurred in the markets, causing volatility and uncertainty. Silicon Valley Bank ( SIVB ) being closed by the California Department of Financial Protection & Innovation, and the FDIC was named Receiver on 3/10/23, has caused questions and speculations to circulate around the banking industry. The Fed continuing to raise rates and Jerome Powell taking a hawkish stance at his testimony on the hill hasn't helped. Intel Corporation ( INTC ) cut its dividend after an interview that can be watched here where Pat Gelsinger joined CNBC to discuss INTC's earnings and address the dividend on 1/27/23, just one month prior. The reduction put dividend safety front and center for income investors, and the continuation of the rising rate environment has impacted the REIT sector, which is a stronghold for income seekers. The Global X NASDAQ 100 Covered Call ETF ( QYLD ) has been a battleground on Seeking Alpha as readers have a split opinion. At the same time, some contributors, including myself, are bullish, while others are impartial or negative. Throughout the recent volatility and every pullback since 2014, QYLD has provided continuous income , and this ETF is a matter of perception and how you look at things. If you're looking for capital appreciation, QYLD isn't a great candidate, but if it's income you seek, then QYLD is very appealing.
QYLD is holding up well compared to the market
The idea that an investment in QYLD comes with additional volatility because it writes covered calls against its portfolio of underlying holdings to generate income continues to be proven untrue. Many comments have utilized the argument that during periods of volatility, QYLD will have wider swings due to its mechanics of incorporating options. Writing an option doesn't alter or change the initial investment, that's not how options work. When QYLD writes an option against their portfolio, they are selling the right to purchase the assets at a specific price and are paid a premium upfront for that right. The portfolio isn't altered, additional risk to the downside isn't added, and QYLD still has the same asset base as it did prior to writing the covered calls.
For instance, in the previous 5 days, QYLD has actually outperformed the SDPR S&P 500 Trust ( SPY ) and the Invesco QQQ ETF ( QQQ ). QYLD is up 0.84% while QQQ has fallen -0.02%, and SPY has declined -2.74%. Over the past month, QYLD is down -1.35% compared to the QQQ being down -2.04% and SPY declining -2.04%. For the past 6 months, QYLD has appreciated 0.57% while the QQQ has outpaced it, increasing 2.33% while SPY trails behind at a decline of -0.74%. In the past 6 months, we have had rates increase, the Fed gets hawkish again, calls of a soft landing fade, and the banking sector comes into question as SIVB failed. None of these metrics in the prior 6 months indicate wider swings of volatility on behalf of QYLD, rather than staying within a range compared to the major indexes. QYLD isn't an investment for everyone, but the data is clear, uncertainty and volatile markets won't cause QYLD to amplify downside risk. These numbers also don't take into account the distributions which have been disbursed to investors.
Since my article on QYLD from 9/26/22, QYLD has increased 5.34% compared to 5.31% on the S&P, but when distributions are factored in, QYLD has generated 10.81% in total return. Looking at my article on QYLD from 12/23/22, QYLD has appreciated by 4.74% compared to 1.69% from SPY, and when distributions are factored in, QYLD's total return is 7.99%. These percentages have been calculated by Seeking Alpha, not by me. The reality is that QYLD's income is real, and volatility and uncertainty aren't triggering additional risk to its options. The risk is that the upside isn't realized if the market goes up because QYLD sold the right to sell its positions at a predetermined price for immediate income.
Seeking Alpha
QYLD is down -32.84% since its inception and this is how I can justify investing in it today
From the inception of QYLD at the end of 2013 through 3/12/18, shares declined to $20.94 on 2/1/16, then recovered and reached $25.31 on 3/12/18. Shares of QYLD have yet to recover since the covid-crash as shares went from $24.11 to $18.23, then back up to $23.45 on 2/15/21, only to fall to its lowest levels since inception. The chart isn't good, and currently, shares have fell -32.84% since inception. Shares could recover as they have in the past, and shares could fall further, only time will tell how the story plays out. What needs to be considered is the income generated and the goal of investing in QYLD.
Since its inception QYLD has not missed a monthly distribution. QYLD invests at least 80% of its total assets in the securities that create the NASDAQ-100 index. The Nasdaq 100 index comprises 100 of the largest domestic and international non-financial companies listed on the Nasdaq Stock Market based on market capitalization. The Nasdaq 100 index is heavily steered towards top-performing industries, including technology, consumer services, and healthcare. Each month QYLD will write or sell one-month call options on the Nasdaq 100 index, which are covered since QYLD holds the securities underlying the options written. 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 interesting because QYLD isn't reliant on dividend harvesting, as there is always an options market to generate income.
Due to QYLD's covered call strategy, investors have never missed a month of income. Since its inception, QYLD has generated $21.61 per share of distributions which is 86.44% of the initial share price at inception. An initial investment of 100 shares of QYLD on the close of its first trading day would have cost $2,504. Today those 100 shares would be worth $1,679 if the distributions were taken as income rather than being invested. The income would have amounted to $2,161 along the way. Rather than being down -32.95% on the investment, the total return when distributions are accounted for would be $1,336 or 53.35%, while still having an asset base that is generating monthly distributions. This doesn't account for reinvesting the distributions along the way. By reinvesting the distributions the share base would continue to increase and subsequently increase the monthly income generated.
If you're looking for income today, regardless if your dollar cost averaging, or starting a new position, QYLD is interesting. There is a track record that exceeds 9 years of paying a monthly distribution in addition to not depending on corporate dividends to generate the yield. Yes, the price of the shares will fluctuate and currently are down from a long-term aspect, but they continue to generate income every month without pulling equity out from the initial shares. I look at this as a business because if you have a business, there isn't a sale price flashing before your eyes every minute of every day. What matters is the delta between the cash coming in and the cash going out, as that is your profit margin. By allocating capital to QYLD you're going to generate monthly income, and the share price will fluctuate, but the income is dependable.
Steven Fiorillo, Seeking Alpha
Conclusion
QYLD isn't an investment that will meet everyone's needs. Before getting excited about QYLD's large yield, investors should research how the fund works. This is not a traditional ETF that buys the Nasdaq 100. QYLD writes covered calls on its assets and limits upside potential to pay large amounts of income to its investors monthly. If the market rallies, the upside in QYLD is capped to an extent. My suggestion is reading other articles on QYLD and going through the Global X site to understand what you're getting into. Just because QYLD fits within my risk threshold and is an investment I am invested in doesn't mean it's a good investment for you. I plan on holding QYLD for decades and reinvesting the distributions along the way unless my investment thesis changes. QYLD's track record is exactly what I am looking for in an income play, and I believe QYLD will appreciate in value over time when the markets rebound.
For further details see:
QYLD Has Provided 12%+ Yields Throughout Market Uncertainty