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Investors today are constantly seeking ways to increase income from their portfolios. With interest rates and bond yields often fluctuating and stock market gains uncertain, many are turning to innovative strategies that can offer reliable income. One such strategy is investing in the Global X Nasdaq 100 Covered Call ETF (QYLD), a fund specializing in covered call writing. This article will explain QYLD's covered call strategy and explore the benefits and drawbacks of adding this ETF to your portfolio.

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What is QYLD?

Global X Nasdaq 100 Covered Call ETF (QYLD) is designed for investors seeking high income through a covered call writing strategy, proven for higher yields, especially in volatile markets.

QYLD focuses on the Cboe Nasdaq-100 BuyWrite V2 Index. The underlying Nasdaq-100 is known for its heavy concentration in innovative technology companies.

QYLD's strategy involves holding the stocks in the Nasdaq-100 index while simultaneously writing (selling) covered call options on that same index. This dual approach aims to provide investors with two potential sources of return:

• The performance of the Nasdaq-100 stocks

• The income generated from the sale of call options

This strategy has the potential to outperform traditional income-focused strategies, particularly in sideways or modestly bullish markets, making it a competitive choice for investors seeking high income.

Covered Call Options Explained📖

To fully appreciate QYLD's strategy, it's crucial to understand the mechanics of covered call options. A call option is a financial contract that gives the buyer the right, but not the obligation, to purchase a specific asset (in this case, the Nasdaq-100 index) at a predetermined price (the strike price) within a specified time frame.

When an investor writes (sells) a covered call option, they're essentially agreeing to sell their shares at the strike price if the option buyer chooses to exercise their right to purchase. In exchange for this agreement, the option writer receives a premium upfront, which is where the additional income comes from.

Let's break down this concept with a simple example:

1. An investor owns 100 shares of a stock, trading at $50 per share.

2. They write a covered call option with a strike price of $55, expiring in one month, and receive a premium of $2 per share ($200 total).

3. If the stock price remains below $55 at expiration, the option expires worthless, and the investor keeps the $200 premium as income.

4. Suppose the stock price rises above $55. In that case, the option may be exercised. The investor sells their shares at $55 each, still keeping the $200 premium in exchange for giving up the upside (as the stock price is higher than $55).

The beauty of QYLD is that it performs this strategy on a much larger scale, writing call options on the entire Nasdaq-100 Index. This approach saves individual investors the time, expertise, and potential transaction costs of independently implementing such a strategy.

Global X: Pioneers in Innovative ETF Solutions✨

The Global X brand is well-known in the ETF space for its focus on innovative, thematic, and income-focused investment strategies. Established in 2008, Global X has become a significant player in the ETF world, particularly in technology, disruptive trends, and yield-generating products. Global X designs ETFs to meet various investor needs, from growth-oriented themes like artificial intelligence and fintech to income-generating solutions like QYLD.

Another ETF issued by Global X that employs a similar strategy is XYLD, which uses covered call writing on the S&P 500 Index. While QYLD focuses on tech-heavy Nasdaq-100, XYLD provides exposure to the broader market represented by the S&P 500. Both ETFs serve a similar purpose—generating income through covered calls—but target different market segments. This shows how Global X offers investors tailored solutions depending on their exposure preferences.

QYLD at a glance

ETF Issuer: Global X

Inception: 11/12/2013

Asset Class: Equity

Underlying Index: Cboe Nasdaq-100 BuyWrite V2 Index

Geographical Focus: U.S.

Expense Ratio: 0.61% (as of last data point)

Dividend Yield: 11.46% (as of last data point)

Distribution Frequency: Monthly

Historical Performance

QYLD is known for its high dividend yield generated by regularly selling covered calls, which attracts income-seeking investors. Throughout 2023 and 2024, QYLD maintained an impressive distribution yield, at times reaching as high as 10-12%. However, due to the nature of covered call strategies, its share price growth has been relatively flat compared to the Nasdaq-100.

ETF Radar View

The radar chart below shows the general characteristics of the ETF:

Top 3 Reasons to Invest

1. High-Income Potential: QYLD's primary appeal lies in its ability to generate substantial income. With yields often exceeding 10%, it stands out in a low-yield environment. This high income can be particularly attractive for retirees or investors seeking to supplement their regular income streams.

2. Exposure to Innovative Companies: By holding the Nasdaq-100 index, QYLD provides exposure to some of the world's most innovative and growth-oriented companies, particularly in the technology sector. This allows investors to benefit from these industries' long-term growth trends while focusing on current income.

3. Professional Implementation of a Complex Strategy: Covered call writing can be a complex and time-consuming strategy for individual investors to implement. QYLD offers a way to access this strategy in a single, easy-to-trade ETF, managed by professionals specialising in options strategies.

Top 3 Reasons Not to Invest

1. Limited Upside Potential: The covered call strategy inherently caps the upside potential of the fund. QYLD may significantly underperform the Nasdaq-100 index in strongly bullish markets as it foregoes some capital appreciation in exchange for option premiums.

2. Higher tax Liabilities: A significant portion of QYLD's distributions may be classified as ordinary income rather than qualified dividends. This can result in higher tax liabilities for investors holding the fund in taxable accounts, potentially reducing the after-tax yield.

3. Complexity and Investor Understanding: The covered call strategy employed by QYLD is more complex than traditional stock or bond investments. Some investors may find it challenging to fully understand how the fund will perform in various market scenarios, which could lead to misaligned expectations.

Boost Your Portfolio with QYLD 💰

In summary, QYLD presents a compelling opportunity for income-focused investors, particularly those comfortable with the trade-offs of a covered call strategy. It offers exposure to top-tier tech companies through the Nasdaq-100 while generating significant monthly income. However, the capped upside and potential tax inefficiencies may deter growth-focused or tax-conscious investors.

When it comes to any investment, including QYLD, understanding the pros and cons in the context of your financial goals, risk tolerance, and market outlook is crucial. At ETF UNO, we are committed to equipping you with the insights and tools necessary to make informed investment decisions.

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DISCLAIMER: This article is for informational purposes only and does not constitute investment advice. Always conduct your own research and consider consulting with a financial advisor before making investment decisions.