Quick Read
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The Global Invesco QQQ Trust (QQQ) has seen a remarkable 737% price return recently, largely supported by big names like Apple and Nvidia. These stocks have not performed well for QYLD, the Global X NASDAQ 100 Covered Call ETF. In contrast, the JPMorgan Nasdaq Equity Premium Income ETF (JEPQ) has achieved an 83% return since May 2022, thanks to its low-cost, actively managed equity-linked bonds.
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QYLD’s approach involves systematic call selling, which can hinder long-term wealth creation during bull markets. This strategy suits investors looking for immediate cash flow rather than capital growth, particularly if they’re using tax-advantaged accounts for income protection.
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Interestingly, analysts who highlighted NVIDIA back in 2010 only focused on their top 10 stocks, and QYLD wasn’t on that list.
The Global X NASDAQ 100 Covered Call ETF (NASDAQ:QYLD) boasts an attractive terminal distribution yield of about 12%, which is roughly ten times the market average. This initial appeal attracted income-focused investors when QYLD launched in 2013, and it still manages around $8.13 billion in assets today. However, investigating how much profit QYLD shareholders have truly made compared to simply holding the underlying index is a more complicated question.
What is the Purpose of QYLD?
Essentially, QYLD attempts to mimic the Nasdaq 100, selling at-the-money call options monthly to generate premium income, which is mostly distributed to shareholders in the form of monthly payments. This rules-based strategy aims to transform baseline equity volatility into predictable cash flows. The fund has an annual expense ratio of 0.60% and manages 102 tech stocks, distributing approximately $2.1320 per share over the following year.
However, a key disadvantage of this approach is that any market appreciation above the strike price goes to the option buyer rather than the fund itself. While this strategy works well in sideways or marginally negative market conditions, it poses a challenge during strong tech bull markets that predominantly feature a few big-growth stocks.
Revealed: A Decade of Subdued Upside
Currently, QYLD trades around $18, down from its initial $25 price. In contrast, the Invesco QQQ Trust (NASDAQ:QQQ) has delivered an impressive 737% return in price since QYLD’s inception in December 2013, while QYLD’s total return with reinvested dividends stands at only 178%.
A hypothetical retiree highlights this disparity: an initial investment of $10,000 in QYLD has resulted in about $14,000 in cash distributions, but the shares themselves are now worth just about $6,500. Taking withdrawals into account pushes the total closer to $20,500, which still pales in comparison to over $30,000 from QQQ. While cash flow from QYLD remained stable, the capital erosion is notable.
The gains from mega-cap stocks like Apple and NVIDIA, integral to the index, explain much of this difference. These leading companies have seen substantial growth since QYLD’s launch, and the monthly options sold against them have often meant lost profits for QYLD holders.
Three Real Trade-offs
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The limited upside is inherent in the strategy. The at-the-money call options result in missing out on any gains past the monthly strike, which is why QYLD consistently underperforms during uptrends. Over the past five years, QYLD has yielded 44%, while QQQ has returned 100%.
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Monthly payouts are declining. Due to reduced volatility, the payments have dipped from $0.188 to $0.233 in 2021 down to $0.172 to $0.179 by 2026. The yield figure may remain steady, yet the actual dividend value is shrinking.
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Tax implications primarily affect taxable accounts. Since most distributions are viewed as ordinary income or capital returns, analysts often recommend QYLD for tax-advantaged retirement portfolios.
Where Are the Alternatives?
There are other products that meet similar revenue needs but in different ways. The Global JPMorgan Nasdaq Equity Premium Income ETF (NASDAQ:JEPQ), for instance, operates under an actively managed bond structure with a 0.35% fee and has achieved an 83% return since its May 2022 founding.
People To Whom QYLD Applies
QYLD is particularly suitable for investors whose primary focus is on immediate cash flow rather than overall returns, especially in stable or directionless markets, and who utilize tax-advantaged accounts. For more active wealth builders or retirees needing capital growth with reliable distributions, data over the past ten years strongly suggests that a pure QQQ investment, or even options like QYLG or JEPQ, might be better ways to extract yield from the Nasdaq 100.
Analysts Who Called NVIDIA in 2010 Named It a Top 10 AI Stock.
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