A Nasdaq 'Covered Call' ETF Grows -- Journal Report
By Simon Constable
An exchange-traded fund that uses an options strategy to
generate income has recently had a surge of investor interest.
In a little over a year, assets under management for Global X
Nasdaq 100 Covered Call ETF (QYLD) have jumped to $990.6 million
from $388 million at the beginning of 2019.
"Lately, we've seen an uptick in flows," says Rohan Reddy, a
research analyst for Global X in New York. He says the fund's
approach, which offers high yields -- currently more than 9% --
while holding on to exposure from the tech-heavy Nasdaq-100 index,
is attractive to those seeking to hedge their bets.
The specifics of QYLD's strategy, known as covered-call writing,
may be simple in concept but can be trickier in practice. The fund
owns stocks in the Nasdaq-100 index such as Apple, Microsoft and
Amazon.com. At the same time, it sells "call" options on the
Nasdaq-100 index each month, the proceeds of which are distributed
to the fund's holders monthly. The call options, which give the
buyer the right to buy assets at an agreed price on a particular
date, will pay out if the index rises during the next month.
"This strategy takes a sophisticated investment approach but
makes it really simple," says Todd Rosenbluth, head of ETF and
mutual-fund research at analytics firm CFRA.
Many Wall Street professionals believe that selling options is
beyond the scope of most individual investors. Not only are options
complicated derivative contracts, the act of selling them at the
appropriate price and in the correct volume is time-consuming and
fraught with potential pitfalls. Global X's covered-call offering
helps simplify the process into a single one-fund trade.
In many ways, the fund offers a defensive strategy -- a reduced
investment risk, but at the price of lower long-term performance,
says Mr. Reddy. In that way, it has similarities to buying
consumer-staples stocks that have high dividends. "It is mainly a
yield-generation process," he says.
Over the past five years, the Global X fund produced annualized
total returns of 8.4%, including the dividend payments, according
to data from Morningstar. That compares to yearly average returns
of 15% for Invesco QQQ Trust (QQQ) which tracks Nasdaq-100 stocks
but not identically to the index.
That difference in performance between those two funds is hefty,
especially when it gets compounded over a few years. That shortfall
raises the question: Why has there been a marked uptick in inflows
to the Global X fund recently?
The answer is that investors are increasingly worried about the
global economy and the markets, and some are looking to hedge their
Stock valuations, when compared with earnings, are high by
historical standards. That's exacerbated by the fact that for the
past few months, concerns over the strength of the global economy
have risen, says Art Hogan, chief market strategist at National
Securities Corp. in New York. Notably, last year's trade war
between the U.S. and China hurt growth, and the coronavirus
outbreak might further damage the world economy.
"There are always things we worry about, but the list is longer
this year," Mr. Hogan says.
Mr. Constable is a writer in Edinburgh, Scotland. He can be
reached at email@example.com.
(END) Dow Jones Newswires
March 08, 2020 23:15 ET (03:15 GMT)
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