ETFs that pay monthly dividends and use a covered call writing strategy to generate income have grown in popularity in recent years. Although this strategy is receiving an influx of attention, it is not necessarily new. In fact, an ETF called Global X NASDAQ 100 Covered Call ETF (NASDAQ:QYLD), launched in 2013, currently has a eye-catching yield of 12%.
While the ETF is appealing to income investors, there are also several things investors should be aware of before jumping in right after seeing this stunning performance. Let’s take a closer look at this monthly dividend payer from Global X and whether it might be right for your portfolio.
Dividend Monster
From a pure income perspective, it’s hard to beat QYLD’s 12% return. This double-digit return is more than double the rate of inflation and eclipses the average return for S&P500 and the ten-year Treasury yield. It also beats the returns of many other popular dividend and high yield ETFs. Additionally, QYLD has a reliable track record in that it has paid monthly dividends to investors for nine consecutive years.
High score holdings
As a fund focused on the NASDAQ 100 index, you won’t be surprised to find that QYLD’s main holdings largely consist of the mega-cap tech stocks that dominate the tech-focused index. Tech giants like Microsoft and Apple enjoy double-digit weightings here, while other top tech stocks like Amazon, Nvidia, both classes of Alphabet shares, Meta Platforms, Tesla and Broadcom are all top ten holdings.
It is only at the tenth largest position, Pepsi, that you come across a non-tech stock.
Below is an overview of QYLD’s top holdings, using TipRanks’ holdings screen.
One thing that stands out from QYLD’s top holdings is that you’ll find plenty of awesome Smart scores here. QYLD has a strong collection of blue-chip tech and growth stocks. Apple, Nvidia and Alphabet stocks all have perfect 10 out of 10 ratings, while Microsoft, Amazon, Tesla and Pepsi all have smart scores of 8 or more, which equates to an outperform rating.
To that end, QYLD earned an impressive ETF Smart Score of 8 out of 10, reflecting several positive indicators such as bullish blogger sentiment and growing hedge fund involvement.
Smart Score is TipRanks’ proprietary quantitative stock scoring system that rates stocks on eight different market factors. The result is data-driven and does not involve any human intervention.
The strategy behind QYLD’s double-digit return
After looking through QYLD’s top holdings, you might notice that aside from Pepsi and possibly Broadcom, none of these names are actually rated as dividend-paying stocks (many don’t pay a dividend at all) , and you wonder how QYLD generates a two-digit value. return on this basket of assets.
QYLD implements a strategy known as a ‘covered call’ or ‘call-sell’, whereby the fund buys shares of the Nasdaq 100 Index and simultaneously sells corresponding call options on the same index.
Essentially, QYLD sells covered call options against the positions it holds and collects option premiums to generate additional income and achieve this high return. This is not a bad strategy; it is similar to those employed by JPMorgan Equity Premium Income ETF (NYSEARC: JEWISH) and JPMorgan Nasdaq Equity Premium Income ETF (NASDAQ: JEPQ), and it certainly generates a high return.
However, one thing investors should be aware of is that, as is the case with JEPI and JEPQ, writing covered calls against these positions will likely limit some of QYLD’s upside in an environment where technology and growth stocks rise.
Long term performance
The possibility of a capped rise is a cause for concern that investors should be aware of. The other is the long-term performance of the ETF. With annualized total returns of around 6.7% since its inception in 2013, QYLD investors have made money. However, while they didn’t lose money, there is an opportunity cost – QYLD underperformed the NASDAQ 100 itself (its benchmark), and it underperformed simply by investing in the S&P 500. Although past performance does not guarantee future results, it is just something investors should watch out for.
Additionally, QYLD’s expense ratio of 0.6% is significantly more expensive than the expense ratios of those simple broad-market strategies that have outperformed it over time – QQQ has a spending rate of 0.2%, while SPIES is only 0.09%.
What is the price target for QYLD?
According to Wall Street analysts, QYLD is currently classified as a Moderate purchase, with an average price target of $19.38. This target represents a potential upside of around 13% from the ETF’s current market value.
TipRanks uses proprietary technology to compile analyst forecasts and price targets for ETFs based on a combination of individual underlying asset performance. Additionally, TipRanks calculates a weighted average based on the combination of all ETF holdings. The average price forecast for an ETF is calculated by multiplying each individual position’s price target by its weight within the ETF and adding them together.
Key takeaway for investors
QYLD certainly has its strengths, like its outsized yield and collection of blue chips with solid smart scores. However, like almost any strategy, it has its pros and cons, and the two main cons here are the limited upside potential due to the covered call strategy and the long-term performance of the fund, which has lagged by compared to the simple investment strategy on the NASDAQ. or S&P 500 while costing investors more in the process.
For a dividend investor looking specifically to add yield to their portfolio, QYLD is an option worth considering, and I give it credit for its reliable long-term track record of monthly payments. However, I personally don’t look to dive based on yield alone and wouldn’t allocate a large portion of my portfolio to it based on those factors.