Is the ‘Global X NASDAQ 100 Covered Call ETF (QYLD)‘ worth your investment capital? Why or why not? And ultimately, should you invest in QYLD?
The covered call ETF QYLD seemed to blow up overnight in popularity. Followers and a cult-like following have caused a massive amount of people to invest in QYLD without considering anything but dividend income.
When I first saw QYLD, it immediately reminded me of a common dividend trap. What seemed different to me, was the following that QYLD was building versus a typical dividend trap. Before you load up on shares of QYLD, make sure you stay to read my findings before deciding if it’s the best place to invest your hard-earned capital. I will also break down the risks and benefits of owning QYLD.
What is QYLD?
The Global X NASDAQ 100 Covered Call ETF is an exchange-traded fund that provides investors with monthly dividends. This means they own a basket of stocks, sell call options against those calls, and provides investors with the premium received. QYLD has a high current expense ratio of 0.60%. It also means of all the call premiums the fund receives, they take out 0.60% for their own investment fees for management.
QYLD tracks the Nasdaq 100 index, as mentioned in the title of the fund. Which means it tracks the 100 largest companies on the Nasdaq. These are mostly technology companies, and they aim to hold the same weight as the Nasdaq (which is according to their market capitalization size).
You can view the stocks that QYLD is holding, or any ETF for that matter, by pulling up their page on Yahoo Finance and typing in the ticker into the search bar. Then click holdings in the menu, and it will show you exactly what percentages of each stock is in the fund. One thing to keep in mind with Yahoo Finance is the data isn’t always up to date day to day.
As you see in the picture above, the largest percentage of assets in QYLD is Apple (AAPL) at 11.41%, Microsoft Corp. (MSFT) at 10.18%, and Amazon.com Inc. (AMZN) at 8.67%. These three companies make up 30.26% of the overall fund, with the top ten holdings making up 56.27% of the total fund.
We will now evaluate the main reason that people love to hold QYLD, and that is the dividend.
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QYLD Dividend Yield and History
Since QYLD sells calls every month, the premium collected will be flexible with the current premium at the moment of selling calls. This means the dividends won’t be the same every month but will remain flexible. The current yield for QYLD is 12.76% (TTM). This means, for every share that you buy of QYLD today, you would have received 12.76% in dividends for the past twelve months. The most recent dividend payment was $0.17 per share for the month of Jan 2023. The last several months have ranged in the $0.16x.
As you can see when looking at each monthly payment, the payments are variable with the premium offered for the call contracts at the time of sale.
The price of the dividends has been falling for the past year, as the stock prices of all the holdings of the fund have also been decreasing, which leads to them being able to collect less and less monthly premiums.
How Does QYLD Work?
QYLD uses a covered call strategy for the Nasdaq 100 index, which is some of the top 100 largest companies in the Nasdaq. The fund buys these top 100 companies, then writes (sells) call options against them monthly to earn income.
Call options give the investor the right to buy a stock at a certain price for a certain date set by the option seller. For this option, the buyer of the option pays the seller money called the option premium for the opportunity. This call premium is distributed to owners of QYLD shares in the form of monthly distributions.
I highlighted the call options that the fund has sold to collect premiums. The managers sold the NDX 02/17/2023 $11,425 call. Currently, when writing this, the NDX is at $12,502.13. This means if it remains above $11,425 by Friday, the shares will be called away since the current price is above the sold call price. One of the downsides to the covered call strategy is when the NDX runs very hard within a month or two, the fund QYLD will miss out on upside gain since they sold the $11,425 calls. Even though they only sell call options on a small percentage of the portfolio, they still missed out on potential gains.
This is one of the reasons the fund QYLD typically underperforms the market. When the NDX goes higher than the call options sold, the fund won’t make any additional money. If the NDX closes above the call option strike of $11,425, then the shares will be called away.
Current daily chart of QYLD
Above is a picture of the daily chart of QYLD from October 2022 till February 2023. At the bottom of the chart, you can see the RSI chart as well as the dividends that QYLD has paid to the investors during this time period. I have overlaid the 50 simple moving average and the 200 simple moving average.
If you see the days that go flat, in the periods of late March 2022, early August 2022, mid-November 2022, and early January 2023. That is because the market (NDX) has rebounded from when they sold the covered calls, and the fund won’t keep increasing in value since the calls will be called away.
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Do I Invest in QYLD?
Yes, but only at certain times. I invest in QYLD (or any other monthly dividend-covered call funds) in a particular way. When QYLD is very oversold, (such as when the RSI is very low on the daily chart, as seen below), is when I make a play on the fund. I have included some examples of when QYLD would become attractive to me.
Play 1:
Here is play one within the past sixteen months. In June 2022, the fund was nearing $17 a share, it had fallen nearly 18% since early April. As this example shows, buying toward the lows of June 16th and holding for a little over a month, would provide a gain of nearly 7%.
I would be buying into the lows, and selling after a solid move of 5-10% on a fund like this.
Here is a breakdown of the profits that would be had after the trade from June 2022. With an initial buy of $3,500 and a QYLD price of $17, would provide you with 205.88 shares of QYLD. The following chart breakdown each gain percentage on the position and how much profits you would be provided.
One of my favorite things to do with a fund like this once I’m up in a trade on what I consider a riskier play is to remove my invested capital and let the profits of the trade roll. This means I’d be removing my initial $3,500 and pending on the percentages of gains, would have shares left over. A gain of 7% from this trade would return $245. This would mean you would be able to keep 13.47 shares of your profits as shares. These shares would provide you with a monthly return in dividends of $2.15503. These funds would be able to reinvest every month into more shares, or you could receive those funds as dividends into your investment portfolio.
Running total of shares: 13.47 shares of QYLD.
Play 2:
Here is play number 2, this play would be in early September 2022. The fund was sold off so hard that the daily RSI was below 20. It rebounded 5.50% over the course of 5 days. This would return another $175.00 profit from the same $3,500 initial investment.
When capturing profits from 5.50% on the investment, it would provide 10.86 shares as profit. This would provide a gain of $192.50 on the trade. These 10.86 shares would provide you with a monthly dividend of $1.74. While these might not seem like a large amount of money, they compound and can make a large number of funds for the future.
Running total of shares: 24.33 shares of QYLD.
Play 3:
Play number 3, it was bottoming around October 11, 2022. QYLD ran 5.11% within 6 days. This would provide a return of $178.85, or 11.16 shares at the current market price of QYLD.
These profits of 11.16 shares of profit, would provide $1.78523 per month in dividends. The addition of 11.16 to the total shares, would give you a running total of 35.49 shares. These shares would provide a monthly dividend of $5.6784.
Running total of shares: 35.49 shares of QYLD.
Play 4:
And finally, play number 4. This play was from late December 2022 and ran higher until mid-February. This gain was easily 7.63% in profits, which is $267.05 in dollar terms. At this price level, it would provide 15.80 shares.
With 15.80 shares as profit, would provide a running total of 51.29 shares, causing a monthly dividend of $8.21 per month. The running total of shares position would be valued at $855.52.
Running total of shares: 51.29 shares of QYLD.
Dividends
Ok, so now you have a position in QYLD, what to do with the dividends? This will be the ultimate decision on how you want to position your portfolio. A few different options you can do:
- Reinvest dividends into QYLD
- Reinvest dividends into other stocks
- Reinvest dividends into other ETFs
- Take cash into a bank account
Reinvest dividends into QYLD
This is known as using the dividends with DRIP. This means every month as dividends come in, they will auto investing in more shares of QYLD. Some investors use this method with all dividend positions, but not me. I don’t use QYLD dividends to reinvest with more as I think the long-term price value will be likely head lower over time and eventually lead to a reverse split.
Reinvest dividends into other stocks
I like to do this with other stocks that I consider to be undervalued. Let’s say the current market prices Pfizer (PFE) at a price I believe to be undervalued, I then would use the dividend payments from QYLD to buy more shares of PFE. This means I can add to my PFE position every month with the cash flows from QYLD.
Have more questions about dividends? Check out our recent article what to do with dividends to help with your questions!
Reinvest dividends into other ETFs
This is likely the “safest” way to use your dividends to invest in other plays. This is because ETFs usually hold hundreds, if not thousands of stocks. This removes single stock risk, and many investors like to constantly dollar cost average (DCA) into ETFs like VOO (S&P500) or VYM (High yield dividend). This means the dividends you earn from QYLD would be flowing into an asset that has strong staying power for the future.
Cash into the bank account
You can take the dividend and deposit it into your bank account, this way you can use the funds to pay for other living expenses. Do you currently have a Netflix account? You can use these monthly dividends to help pay your Netflix bill! Have a car insurance bill of $100 a month? These dividends will help lower your bill!
While everyone will have a different need, or approach to dividends, there is really no true “right answer.” What you decide to do with your dividends and invested money is up to you.
Taxes
For starters, it’s essential to consult a local CPA for tax advice before making any investment decisions or questions.
With that being said, it is important to understand whenever you buy sell, and stock at a profit, that is considered a taxable transaction. Your broker will be sending the details of that trade to the IRS at the end of the year. This means the four trades above, each would be considered a taxable transaction. Knowing exactly how much you will have to pay in taxes will depend on your individual tax situation and the state in which you live. This is also the reason so many dividend investors love to use RothIRAs to invest, that way you don’t have to pay constant taxes on the dividends.
I understand this when I’m investing, while it is not fun making tax payments at the end of the year, I see it as a positive thing. It means you made money from trading! Holding stocks on the ride up, then clearly watching them free fall just so that you don’t have to pay taxes to me seems detrimental to your account. Yes, you pay less in taxes at the end of the year, but you also have a lower account than what you would’ve had if you took all the profits as shares.
As a reminder, I am not a financial advisor. Anything I say is not financial advice. Past experiences or knowledge is not a guarantee for future results. Anything provided should be used for education purposes only. Consult with a financial advisor before making investment decisions. Using any referral links may provide us with funding to continue the operations of this website.
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