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Summary

  • The Recon Capital NASDAQ 100 Covered Call ETF is the only ETF that utilizes a buy-write strategy based on the NASDAQ 100.
  • Since its inception this ETF has performed largely as would be expected - underperforming in a bull market while outperforming in a volatile or bear market.
  • While the asset base is still thin, assets have increased four-fold recently, indicating an increasing interest in options-based ETF investing strategies.

Many options traders and more seasoned investors like to try to enhance the return on their positions through the use of call or put options. Novice investors not familiar with or comfortable with trading in options may stay away, but still like the idea of increasing the income generated by their portfolio. Within the last year, an ETF was launched that attempts to utilize just that strategy and do the options work for you. The Recon Capital NASDAQ 100 Covered Call ETF (NASDAQ:QYLD) utilizes a buy-write strategy for the biggest NASDAQ-traded companies and so far the results have been largely what you'd expect.

To provide a little background, the Recon ETF again utilizes a buy-write strategy - taking a long position in a stock while simultaneously selling a call option on the same stock in an attempt to generate additional income. Many traders use the covered call strategy for their own portfolios and there are other ETFs out there that use option-based approaches as well (the ALPS U.S. Equity High Volatility Put Write Index Fund (NYSEARCA:HVPW) is one of the largest), but the Recon ETF is unique because it is the only ETF out there that uses the covered call strategy solely on the NASDAQ 100.

How well this fund performs is largely dependent on the performance of the market, but the investing style should help limit volatility. In a rising market, you'd expect the fund to underperform, as the calls written by the fund managers get exercised and the underlying securities get called away. Conversely, in a down or flat market, you'd expect the fund to outperform, as the written calls remain out of the money and the fund pockets the options premium.

The chart shows that this is happening with the Recon ETF.

Since May, the fund has seen a significant performance lag, as the NASDAQ 100 has experienced almost a straight line advance. However, during periods of volatility or down markets (e.g. January 2014, August 2014), the Recon ETF has provided some downside protection.

The Recon ETF has only been making monthly distributions since the beginning of the year, but if you extrapolate those numbers out to a full year, you're looking at a yield of over 9%. For those worried that the dividend yield is unsustainable, consider the fact that the ETF's underlying index - the CBOE NASDAQ 100 BuyWrite Index (BXN) - has generated a similar dividend over the last five years.

Another thing to consider is the liquidity of an ETF such as this. The Recon ETF has a very small asset base (around $10 million currently) and is very thinly traded (a little over 3,000 shares a day trade hands on average). As such, bid-ask spreads have the potential to be quite large and can affect an investor's entry or exit point.

Conclusion

Obviously, this ETF doesn't generate simply a "NASDAQ 100 return plus 9%" return. Its primary use would be as either a risk reduction tool or as an income enhancement tool should investors believe that the market is headed sideways or down. To that extent, the fund has largely performed as would be expected. A lot of investors don't necessarily have the insight or expertise to successfully execute an option-based strategy so an ETF that utilizes the covered calls to enhance return would be ideal for those who want to get involved but not too involved.

But an ETF like this has a place in a larger portfolio. The potential for return enhancement, risk reduction and a 9% yield to boot make for a solid addition to most portfolios.

Source: Earn A 9% Yield With This Covered Call ETF