The Global X NASDAQ 100 Covered Call ETF (QYLD) is struggling this year. QYLD has rallied to $16.7, up by 21% from its lowest level this year.
Unlike other funds, it remains much lower than the year-to-date high of $17.6 and has had outflows in the last six consecutive weeks. Its net inflow this year was $495 million, bringing its total assets to over $8 billion.
What is QYLD ETF and how it works
The Global X NASDAQ 100 Covered Call ETF is one of the biggest players in the covered call sector. Its goal is to generate substantial returns by tracking the Nasdaq 100 Index.
While top Nasdaq 100 Index ETFs provide a 1% return, the QYLD has a dividend yield of about 13%, making it popular among dividend investors.
The QYLD ETF uses a different approach to other covered call funds in the way it is designed. It is a passive fund that tracks the CBOE NASDAQ-100 BuyWrite V2 Index.
This index employs a strategy of holding all companies in the Nasdaq 100 Index, which is primarily composed of technology companies such as Apple, Nvidia, Microsoft, and Google. Historically, the Nasdaq 100 Index has been one of the best performers in the United States.
By investing in the Nasdaq 100, the fund aims to benefit from its strong performance over time. At the same time, it sells at-the-money (ATM) covered calls on 100% of the portfolio. A covered call involves owning an asset and then selling call options, collecting the premium, which it then distributes to investors.
The ETF benefits substantially during the highly volatile periods in the market as option premiums increase. However, the challenge is that the options premium caps the upside when the underlying asset is in a strong trajectory.
The QYLD ETF is often compared to the JPMorgan Nasdaq 100 Premium Equity ETF (JEPQ), which also aims to generate superior returns by leveraging the covered call strategy.
However, the two funds are different in that JEPQ is an active fund where JPMorgan’s experts select stocks in the Nasdaq 100 Index, while QYLD is a passive one.
The other difference is that QYLD sells ATM calls, while JEPQ sells out-of-the-market (OTM) calls that earn it a lower premium, while retaining more upside potential.
Is QYLD ETF a good investment?
For an investor interested in American technology companies, there are two main ways to go about it. One can invest in a fund that tracks the Nasdaq 100 Index, like QQQ and QQQM. These funds generate more returns, while giving a lesser dividend.
The other option is to invest in covered call ETFs like QYLD. While these funds generate a higher dividend income, the reality is that they are less profitable in the long term.
For example, the QYLD ETF has an expense ratio of 0.60%, higher than most passive funds. Also, it is taxed differently than other passive funds, adding to its higher costs. In a statement, the co-founder of NEOS, which runs similar funds said:
“The space is growing, and one of the things we always tell investors is do your homework. It’s very important to understand not only what you’re buying but what the tax implications behind it is.”
Most importantly, the fund’s total return is significantly smaller than that of other funds that track the Nasdaq 100.
For example, QYLD’s total return in the last three years was 44%, much lower than the Nasdaq 100’s 100% and JEPQ’s 73%. The same is happening this year as its total return is minus 0.37%, while the other two generated 12% and 6.50%, respectively.
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