In a historically low yielding environment, investors need to consider fresh approaches to generating income beyond common stocks and bonds. A new exchange traded fund can rejuvenated the income proposition.
The Global X Nasdaq 100 Covered Call & Growth ETF (QYLG) debuted last month. As its name implies, the new QYLG is a covered call spin on the widely followed Nasdaq-100 Index (NDX), but it’s a different beast than many of the legacy ETFs in this category.
Investors have long capitalized on covered call options strategies for income generation or protective put options strategies to protect against and limit losses. However, the rub with call writing is that it limits investors’ upside prospects, a problem QYLG addresses.
QYLG’s underlying index is only half allocated to covered calls on the NDX while the other half is allocated to the traditional equity portion of NDX. This approach seeks to capture approximately half of any upside potential of the equity indexes they track, while also potentially achieving additional income through the premiums received from writing options.
QYLG Winning in Both Directions?
QYLG offers benefits on both the up and down side of the equation.
“If there was a 1% gain on the index, a full covered investor would not partake in the gains, but a 50% covered investor would take part in 0.5% of the upside,” according to Global X research. “If there was a 1% decline on the index, a fully covered investor would still take part in the equity decline, but the decline may be partially offset by the options premium received. A 50% covered investor would also take part in the equity decline, but the decline would be greater than the 100% fully covered investor’s decline because the 50% covered investor only received half the options premiums.”
QYLG offers other important benefits, including high income and reduced volatility relative to more traditional, tech-heavy equity strategies.
“The Nasdaq 100 is primarily an Information Technology sector-focused index and excludes Financials, whereas the S&P 500 Index is more sector-diverse. Because of these sector differences, the drivers of these two indexes, as well as performance, volatility, and correlation to other income strategies can vary significantly,” according to Global X.
Covered call strategies can potentially augment a portfolio during periods of heightened volatility. The covered-call options allow an investor to hold a long position in an asset while simultaneously writing, or selling, call options on the same asset.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.