QYLD: 12% Tech Yield, But There's A Hidden Outperforming Alternative

Summary

• QYLD is a high-yield ETF that sells covered calls on the Nasdaq 100 index.
• QYLD yields 11.84% and pays monthly.
• We compare QYLD to another Nasdaq covered call high yield vehicle that has delivered much higher returns.
• Looking for more investing ideas like this one? Get them exclusively at Hidden Dividend Stocks Plus. Learn More »

Nikada/iStock Unreleased via Getty Images

Want to earn attractive income from big tech? The tech-heavy Nasdaq is up ~417% since the October 2007 highs, vs. 181% for the S&P 500, 159% for the Russell small caps, and ~146% for the Dow:

It's hard to ignore that type of outperformance, even if your main focus is income investing. However, as we've groused about in many articles, tech companies don't pay very attractive dividends compared to other sectors.

That's where income vehicles like the Global X Nasdaq 100 Covered Call ETF (NASDAQ:QYLD) come in. QYLD uses a covered call option selling strategy to generate attractive income for its shareholders.

Sounds like an interesting plan, but there's a hitch - for investors looking for a combo of attractive income and price gains, QYLD's lesser-known competitor, the Nuveen Nasdaq 100 Dynamic Overwrite Fund (QQQX), would be a better alternative.

QQQX "is designed to offer regular distributions through a strategy that seeks attractive total return with less volatility than the Nasdaq 100 Index by investing in an equity portfolio that seeks to substantially replicate the price movements of the Nasdaq 100 Index, as well as selling call options on 35%-75% of the notional value of the Fund's equity portfolio (with a 55% long-term target) in an effort to enhance the Fund's risk-adjusted returns." (QQQX site)

This five-year chart shows QQQX with a $22.38K return on a $10K investment, ~24% higher than QYLD. QQQX also outperformed on a price basis, with a $15.89K price return, with a ~50% higher return than QYLD's $10.21K 5-year return:

(YCharts)

Looking at other time periods also shows QQQX with an advantage. It has outperformed QYLD on both an NAV and price basis over the past 1, 3, 5-year periods, and since inception:

That outperformance has continued in 2021, with QQQX up 13.23% year to date, vs. -1% for QYLD. However, QYLD has outperformed QQQX over the past month.

Here's the trade-off - QQQX achieved better price gains via selling options against a smaller % of its portfolio, currently ~60%, vs. 100% for QYLD.

That makes sense when you think about that big 400%-plus rise in the Nasdaq over the past 13-14 years. Since covered calls limit the upside price gain potential, in exchange for receiving call option $, QQQX was able to capture more upside from the NASDAQ.

QQQX yields 6.11%, much lower than QYLD's 11.84% yield, and pays quarterly, while QYLD pays monthly. It holds 159 positions, vs. 103 for QYLD.

QYLD is an ETF, while QQQX is a closed-end fund, a CEF, which means that it can trade at a premium or a discount to its NAV.

While QQQX has been around for nearly seven more years than QYLD, it's a bit under many investors' radar: It's less than a third of QYLD's asset size, and its daily volume is only 5% of QYLD's. Its expenses are slightly higher, at .91%, vs. .60% for QYLD, and neither fund uses leverage.

Distributions:

Both funds' distributions vary. QYLD's most recent monthly payout was $.223, which gives it a forward yield of 11.84%. It should go ex-dividend next on ~8/24/21. QQQX's most recent quarterly payout was $.4485, and it should go ex-dividend next on ~9/14/21.

QYLD does have a higher five-year distribution growth rate, of 4.99%, vs. 2.69% for QQQX:

Valuations:

As an ETF, QYLD's share count changes as investors move in and out of the fund, so the premiums and discounts to NAV are usually quite small.

Being a CEF, with a fixed amount of shares, QYLD has more opportunities to sell at deeper discounts or higher premiums to NAV. Its deepest discount over the past year was -7.65%, and its highest premium was 4.3%.

As we've mentioned in previous articles, buying CEF's at deeper than average historical discounts to NAV can tip the scales in your favor, due to them reverting to their mean average discounts over time.

QQQX was selling at a 1% premium to its 8/3/21 NAV, as of the 8/4/21 close, while QYLD was at a 0.13% premium. Both funds' NAV has appreciated considerably since their inceptions:

Taxes:

QYLD's 2021 distributions have much more return on capital, ROC, at ~98%, vs. a 52.5%/47.5% Capital Gain/ROC split for QQQX. ROC can be a useful tax deferral advantage, but you should be aware that it does decrease your basis, which will up your tax bite if you sell.

Holdings:

Not surprisingly, both funds have similar top holdings, although QYLD holds Adobe (ADBE), while QQQX holds Comcast (CMCSA) and Cisco (CSCO). QYLD's top 10 holdings form ~54% of its portfolio, while QQQX's top 10 form 69% of its portfolio.

QYLD's Top 10:

(QYLD site)

QQQX's Top 10:

(QQQX site)

QYLD's top sector holding is Tech, at 47%, but there's also ~20% exposure to Consumer Discretionary and 19.7% exposure to Communication Services, as well as holdings in Health Care, Consumer Staples, Industrials, and even minor holdings in Utilities and Financials:

(QYLD site)

QQQX's top sector holdings are similar, since it's also based upon the Nasdaq, with tech leading, at 44%, and holdings in Communication Services, Consumer Discretionary/Cyclical, Health Care, Financials, and Consumer Staples:

(QQQX site)

Options:

As you may have noticed from our articles, we've been writing about options selling for many years here on Seeking Alpha.

The covered call strategy can be useful in creating additional income, particularly on individual stocks which trade in a narrow range. Additionally, if you want to hang onto a stock paying an attractive yield, for income or tax reasons, it can be a way of gaining some downside protection, via the option premiums.

The risk is that your stock will suddenly find new life and blow past your call strike, giving you a capital gain, but losing you its ongoing dividend income. For that reason, it may be best to try to sell at call strikes as high above your cost/share as practical.

Covered Call Trade:

Here's an example of a covered call trade on an individual stock, from our Covered Calls Table, where you can see more details.

Chemours (CC) pays $.25/quarter, and goes ex-dividend next in mid-August. The October $35.00 call option pays $1.30, for a nominal call yield of 4% in just over two months, or ~20% annualized.

NOTE: We use annualized yields in our options tables so that subscribers can compare trades of differing time periods.

All tables by DoubleDividendStocks.com, except where noted otherwise.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in QQQX over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Our DoubleDividendStocks.com legacy service features options selling for dividend stocks. It's a separate service from our Seeking Alpha Hidden Dividend Stocks Plus service. Disclaimer: This article was written for informational purposes only, and is not intended as personal investment advice. Please practice due diligence before investing in any investment vehicle mentioned in this article.

Comments

[ShalomTech]

How does QYLD have such a high rate of ROC? Is this normal for them?

[Mynor Damian Mejia]

Seems like the QYLD via call selling on 100% is better prepared for correction, clearly will sacrifice any potential upside that I see un likely at this point. In general I enjoyed the read and comparison. Many thanks.

[NV_GARY]

QQQ returned about 90% more than QQQX - divs reinvested, and ~ 241% more with no reinvestment.

[PendragonY]

@NV_GARY

Over what time period?

[chris.strickland]

@NV_GARY After the what time period, how'd it do with negative dollar cost averaging when you are selling shares for income during a 30% correction. Income and growth investing are two different strategies.

[CatchingFIRE]

@NV_GARY

$TQQQ returned over 29 times the return of $QYLD, and over 7.5 times the return of $QQQ since the inception of $QYLD.

If total return over long periods of time is all that matters, why not just buy $TQQQ and sell periodically to fund a retirement?

/sarcasm

[Bocaita]

Has anyone noticed that in the GBPD (Great but Brief Pandemic Debacle), while QYLD declined 23% and QQQ 27%, QQQX declined by more, by >35% ?

[achilleus]

@Bocaita yes I believe the author pointed it out in the comment section

[PendragonY]

@Bocaita

Do you mean that writing 100% ATM calls against the portfolio actually worked for the best situation for it? And produce more gains from the calls than the fund that had a max of 75% of its portfolio covered with such calls?

[PermaFrostByte]

@PendragonY He didn't ask for you to rephrase his question, he asked if you noticed the GBPD event?

[PermaFrostByte]

Another clickbait title.

Any investor who is familiar with $QYLD is also familiar with $QQQX…there is nothing “hidden” about it. Lame article title.

[jbtayl]

@PermaFrostByte Well not ANY investor. $QYLD gets a lot more attention.

[Monthly Income Investor]

@PermaFrostByte authors of published articles dont pick the titles of their articles, SA does.. complain to SA, not the author.

[AllStreets]

Is there an ETF that invests in QQQ and buys put options or put spreads as a hedge instead of selling call options? It looks to me like both QQQX and QYLD have suffered severe under performance versus QQQ in an up market due to the limitation of gains from selling near to the money calls, and they also impose a potential extra future capital gains tax in taxable accounts due to ROC distributions. They would be better than naked long QQQ in a down market by limiting losses, but it seems to me that a fund with long put spreads would be better than either in an up or down market but only better than naked QQQ in a down market.

[Double Dividend Stocks]

@AllStreets
Thanks for your input.
We'll let you know if we find one.
DDS

[PermaFrostByte]

@AllStreets There is $PUTW which is an S&P 500 PutWrite fund. Since it’s not actively managed, though, the fund tends to get whipsawed into losses on a regular basis. Because of that issue the distributions are unimpressive. It might be what you’re looking for though.

[skoons6694]

@AllStreets I read some where that you could do an 80/20 or 75/25 QYLD/QQQ allocation and the 20-25% QQQ would offset any decay of the QYLD.

[Pablo]

QQQX pays quarterly and looks like huge % RoC. Unsure because sometimes return of capital real isn't just truly the investor's capital but rather market gains.

[Diesel]

The good news is that ROC is not taxable.

[PendragonY]

@Diesel

Well, not exactly. ROC lowers the cost basis of your position. So it won't be taxable until you sell. And then it will increase your gain (or lower your loss).

[Double Dividend Stocks]

@Diesel ROC defers your taxes until you sell. Your basis is lowered by it though, so the tax bite comes due when and if you sell.

Thanks for reading and commenting.
DDS

[AllStreets]

I don't get why the dividend is significant if it's all return of capital. It's about the same as holding QQQ and selling about 1% of the holdings every month, except for the deferred capital gains tax, if applicable. QQQ has vastly outperformed QYLD on total return. Apparently the 0.6% 12b-1 fee and the options selling activity is a big drag on performance.

[Double Dividend Stocks]

@AllStreets
The dividend income is significant for an income investor, and for some, the ROC tax deferral feature can also be an advantage.

Thanks for reading and commenting.
DDS

[SayeretJoe]

@Double Dividend Stocks so at what rate is the dividend taxed? Thanks for the article!

[Jcb331]

@SayeretJoe according to QYLD web site. all of 2021 dividends have been Tax deferred ROC.

[PendragonY]

The problem with selling cash-settled options on an index is that in a strong up market you have to return a bunch of the premium. when the index goes above your strike price. And QYLD writes calls very close to the current price, so it is losing cash when the index moves up only a little. QQQX has a bit more flexibility on price and timing and combined with covering a lower percentage of its portfolio with calls, it loses a lot less in an up market.

[achilleus]

@PendragonY
One can make an inference.... that a guy could hedge those two, drawing income from both, while moderating the risk of an up market

[PendragonY]

@Double Dividend Stocks

"As an ETF, QYLD's share count changes as investors move in and out of the fund, so the premiums and discounts to NAV are usually quite small."

Not sure exactly what you were trying to say, but as an exchange-traded fund, regular investors buying or selling shares don't change the share count.

[hafen]

So, it’s not an easy choice. I’m 80, monthly i take out 40% of my dividend (you know, distributions) income. Should I be investing for income or growth? There’s nothing wrong with the income level from QQQX, right? But then why walk away from a much higher yield from QYLD? I own a bunch of each, I feel a little more “swanish” with it, but I guess it boils down to which would fare better in any likely markets over the next 5-10 years? Dunno.

[Double Dividend Stocks]

@hafen
Good plan.

Thanks for reading and commenting.
DDS

[bryan555]

Any analysis of QYLD always sparks a lot of comments, particularly if there is any suggestion that there may be better ways to go. Left Banker had an absolutely devastating look at QYLD -- from a total return basis -- which set the cat amongst the pigeons, a few weeks ago.

My own observation is that there are investors who understand total return, and those who seem laser-focused on monthly income. QYLD is the darling of the second cohort.

[achilleus]

@bryan555 imo it’s the correct way to view it bryan.
I wouldn’t use a shovel to cut down a tree. It’s the wrong tool for the job. And I wouldn’t use an axe to dig a ditch because that’s also the wrong tool.
I don’t buy things like BNTX or MRNA for income. I buy them to build capital.
And I don’t buy things like qyld or qqqx for growth. I buy them to pay the monthly bills.

Somebody else was on here saying qqq is superior which is true. For growth. It isn’t superior for income.

[F-86 Sabre]

@achilleus Well said.

[achilleus]

@F-86 Sabre well thank you Sabre seems kinda rare to get anything but grief and hate on the internet anymore makin' me a little bitter too tbh

[Bocaita]

In re QYLG, I was going to suggest the same thing as @PermaFrostByte
Obviously, QQQ itself has destroyed everything in sight since QQQX's inception (beginning of 2007). So, isn't a more interesting question : How would QQQX
and QYLG ) perform, in itself and relatively, IF QQQ went sideways or slid for awhile, as it must (some day). Would you not have to dig deeper in to the 2 funds "strategies" and such, rather than just recent price movements, valuations and holdings ?

[PermaFrostByte]

Another misinformed article comparing $QYLD to growth funds. It is not a growth fund, so comparing it to one makes no sense. A better comparison would have been between $QQQX and $QYLG. Although $QYLG is fairly new, at least you would have been comparing apples to apples.

Why would you recommend investors buy $QQQX at a premium over $QYLD? That is not a good investment recommendation.

You did not consider the superior returns of $QYLD while DRIPping.

$QYLD is not an CEF.

Given the current premium for $QQQX investors would be wise to avoid it and go with $QYLD for their income needs. I also like $RYLD; I own both $QYLD and $RYLD. For growth there are thousands of other options to choose from. Many of which I have as well.

[achilleus]

@PermaFrostByte it’s always surprising to see people assuming that income and growth are the same thing.

[PermaFrostByte]

@achilleus Absolutely. You think at some point they’re going to finally get it; but they never do.

[PendragonY]

@PermaFrostByte

Well, QYLD does in fact invest in the Nasdaq 100 index. It is instructive to compare them on a total return basis. QYLD uses options to turn capital gains into income. It isn't a perfectly efficient process. QQQX does something similar and does so with better total return results. It may or may not be a good buy today, but it being too high in price doesn't cure the problems with QYLD.

[Diesel]

QYLD is your good old fashioned yield trap that is hardly sustainable.

[PermaFrostByte]

@Diesel Says the person who doesn't own $QYLD.

[Diesel]

I own a very tiny amount of QYLD but I wouldn't buy more when there are much better options out there.

[Yield on Cost]

@Diesel Like?

[Raven27936]

What about CEF STK its better than both of them with Div reinvested.
If you need cash then QQQX has superior returns of all 3 when NO dividends are reinvested.

[Double Dividend Stocks]

@Raven27936
We're long STK.

Thanks for reading and commenting.
DDS

[Maxim Smirnov]

Thanks for the article, long QYLD, will consider QQQX. It would be good to see how both QYLD and QQQX behave (both in terms of unit price and distribution) in case of market drop.

[msh305]

@Maxim Smirnov QYLD's 7/27 distribution of $0.222 was roughly 1%, as usual.

[Double Dividend Stocks]

@Maxim Smirnov
QQQX fell 34%, and QYLD fell 23% in the '20 COVID Crash.

Thanks for reading and commenting.
DDS

[chris.strickland]

I own both, I make more capital gains from QQQX but better income from QYLD. Both combined work out well.

[Double Dividend Stocks]

@chris.strickland
Good concept.

Thanks for reading and commenting.
DDS

[SleepyInSeattle]

There is no debate for me on QYLD vs, QQQX Vs, NUSI, vs QQQ vs BST etc.. -- I own all five and SWAN - each has its merits.

[Double Dividend Stocks]

@SleepyInSeattle
Looks like you have the NASDAQ covered in a big way. Interesting approach.

Thanks for reading and commenting.
DDS

[draconian5849]

@SleepyInSeattle $SWAN is an underrated ETF. It has had good risk-adjusted performance so far.

[Monthly Income Investor]

"Being a CEF, with a fixed amount of shares, QYLD has more opportunities to sell at deeper discounts or higher premiums to NAV. Its deepest discount over the past year was -7.65%, and its highest premium was 4.3%." ... I think you mean QQQX there, not QYLD.

[Mike the Elder]

@Monthly Income Investor Agree, I saw that too.

[Double Dividend Stocks]

@Monthly Income Investor
DOHHH! Correction:
"Being a CEF, with a fixed amount of shares, QQQX has more opportunities to sell at deeper discounts or higher premiums to NAV."
Thanks for catching that.
DDS

[Double Dividend Stocks]

@Mike the Elder
Yes, we meant QQQX.
Thanks for reading and commenting.
DDS