I have been a financial advisor and watching the market for over 25 years. Many of my friends and family ask me about the stock market on a regular basis. Last night, I received a call from a friend asking me if he should buy “The Global X NASDAQ 100 Covered Call ETF (QYLD)”?
He knows I love covered calls and I had taught him how to sell covered calls on some of his stocks to create income. QYLD ETF is currently yielding over 11% that pays monthly and appeared to be the perfect income ETF for him.
Like most investments, QYLD has positives and negatives. After explaining these to my friend he decided not to purchase the ETF at this time. The biggest negative for him was the tax consequences and sector risk.
That being said, many investors may choose to buy QYLD after reviewing the fund. The tax issues may be avoided by putting it into a qualified account. The purpose of this article to provide an unbiased review QYLD. As always, you should do your own research before investing.
Table of Contents
How does QYLD make money?
QYLD seeks to capitalize on the upside potential of the Nasdaq 100 by using derivatives in its funds. The fund helps investors make money by selling call options and passing on the income to investors.
While this strategy is very effective, it can lead to large losses if the fund’s positions are not properly managed. Note that QYLD uses a lot of leverage, which means it can trade more aggressively but still earn significant returns.
How are QYLD dividends taxed?
The first question anyone should look at when buying an investment for dividends is the tax treatment. Dividend payments can be qualified or ordinary. A qualified dividend payment gets the lower tax rate, while ordinary dividend payments are taxed under the standard income tax schedule. Read More – Qualified Dividends vs Ordinary Dividends – What is the difference?
QYLD has the most complex taxation I have seen. The dividend payments would normally be filed under an ordinary system with some kind of special tax incentive for the options sales. However, investors are not getting taxed at all because it is a return of capital. This could be very bad if you ever sell the ETF because you are going to owe a lot of taxes.
Anyone looking to purchase QYLD needs to spend time talking to a tax professional before buying it. I think the only way to buy it is in a ROTH IRA due to the tax treatment.
QYLD’s Stock Market Performance
The past performance of QYLD is less than stellar, but people don’t generally buy the ETF for the growth potential. The chart above shows the dividend-adjusted return since inception of 91.6% compared to the S&P 500 of 177.6%.
|Company||Global X NASDAQ 100 Covered Call ETF|
|Best Monthly Return||8.90%|
|Worst Monthly Return||-14.30%|
|Max Drawdown 1-Year||-8.60%|
What is covered call writing?
Covered call writing is when an investor sells a call for a premium. This is a great way to create income in a portfolio. In this case QYLD is selling calls against its Nasdaq 100 holdings.
If the market goes down or stays the same, then it gets to keep the premium. However, if the market is up on the exercise date, then it keeps the premium, but must sell at the strike price.
If you like to learn more about selling covered calls, click here for our covered calls for income article.
What are covered call ETFs?
Covered call exchange traded funds (ETF)s are professionally managed funds that use covered calls and usually other types of options to create income or boost the performance of the fund. Investors like them because covered calls are way to lower the risk, while increasing income. The downside to covered calls is primary the expenses and the taxes.
What is QYLD’s underlying index?
The Nasdaq 100 is QYLD’s underlying index. This index is composed of large tech companies.
How do volatile markets affect QYLD?
Volatile markets have both a negative and positive effect on QYLD. It can have a positive effect because when the market is more volatile the cost of premiums goes up. This increases the income of the ETF. The fund’s NAV has remained very constant and is not designed to grow.
However, a bearish market or one when the tech sector goes down could affect the overall value of the fund. This is due to the actual holdings which is the primary risk of any covered call strategy.
QYLD holdings are a bit more complex because it is a covered call ETF. I was unable to find a list of all the contracts but was able to get the underlying securities and percentages as of 6/29/21.
|% of Net Assets||Ticker||Name|
|4.217||FB||FACEBOOK INC-CLASS A|
|4.09||GOOG||ALPHABET INC-CL C|
|3.668||GOOGL||ALPHABET INC-CL A|
|2.621||PYPL||PAYPAL HOLDINGS INC|
|1.978||CMCSA||COMCAST CORP-CLASS A|
|1.703||CSCO||CISCO SYSTEMS INC|
|1.382||TMUS||T-MOBILE US INC|
|1.364||TXN||TEXAS INSTRUMENTS INC|
|1.353||COST||COSTCO WHOLESALE CORP|
|0.977||AMAT||APPLIED MATERIALS INC|
|0.839||ISRG||INTUITIVE SURGICAL INC|
|0.813||AMD||ADVANCED MICRO DEVICES|
|0.719||ZM||ZOOM VIDEO COM-A|
|0.695||MU||MICRON TECHNOLOGY INC|
|0.692||LRCX||LAM RESEARCH CORP|
|0.68||BKNG||BOOKING HOLDINGS INC|
|0.638||GILD||GILEAD SCIENCES INC|
|0.632||ADP||AUTOMATIC DATA PROCESSING|
|0.554||ATVI||ACTIVISION BLIZZARD INC|
|0.471||ADI||ANALOG DEVICES INC|
|0.43||NXPI||NXP SEMICONDUCTORS NV|
|0.417||BIDU||BAIDU INC – SPON ADR|
|0.4||IDXX||IDEXX LABORATORIES INC|
|0.377||MRVL||MARVELL TECHNOLOGY INC|
|0.37||KHC||KRAFT HEINZ CO/THE|
|0.368||MNST||MONSTER BEVERAGE CORP|
|0.367||KDP||KEURIG DR PEPPER INC|
|0.364||WDAY||WORKDAY INC-CLASS A|
|0.357||ALGN||ALIGN TECHNOLOGY INC|
|0.34||LULU||LULULEMON ATHLETICA INC|
|0.33||ROST||ROSS STORES INC|
|0.326||MTCH||MATCH GROUP INC|
|0.317||EA||ELECTRONIC ARTS INC|
|0.31||AEP||AMERICAN ELECTRIC POWER|
|0.307||MCHP||MICROCHIP TECHNOLOGY INC|
|0.292||ORLY||O’REILLY AUTOMOTIVE INC|
|0.287||CDNS||CADENCE DESIGN SYS INC|
|0.269||XEL||XCEL ENERGY INC|
|0.246||PTON||PELOTON INTERACTIVE INC-A|
|0.233||SWKS||SKYWORKS SOLUTIONS INC|
|0.21||VRSK||VERISK ANALYTICS INC|
|0.209||MXIM||MAXIM INTEGRATED PRODUCTS|
|0.206||SIRI||SIRIUS XM HOLDINGS INC|
|0.177||DLTR||DOLLAR TREE INC|
|0.137||TCOM||TRIP.COM GROUP LTD-ADR|
|0.117||CHKP||CHECK POINT SOFTWARE TECH|