For months, the share prices of most stocks have been in the doldrums or worse. Large-cap tech stocks have been the exception, posting nice gains so far this year.
Let’s check how a couple of covered call ETFs have performed compared to the most popular tech stock ETF.
It’s my favorite way of investing in tech…
The Invesco QQQ Trust ETF (QQQ) tracks the Nasdaq 100 stock index—the 100 largest companies that trade on the exchange. The portfolio is the who’s who of large-cap tech companies. Here are the top ten holdings.
- Microsoft Corp. (MSFT)
- Apple Inc. (AAPL)
- Amazon.com Inc. (AMZN)
- NVIDIA Corp. (NVDA)
- Meta Platforms Inc. (META), a/k/a Facebook
- Alphabet Inc. Class A (GOOGL), a/k/a Google
- Alphabet Inc. Class C (GOOG), also a/k/a Google
- Tesla Inc. (TSLA)
- PepsiCo Inc. (PEP)
- Broadcom Inc. (AVGO)
As of May 17, QQQ has gained 25.2% this year to date. For comparison, the S&P 500 has gained 8.75%, with almost all of those gains coming in January. QQQ has climbed steadily higher every month.
Covered call ETFs use an option selling strategy to generate cash income with an underlying portfolio. Selling calls can generate excellent cash income, but it also puts a cap on potential capital gains.
Two option-selling ETFs use the QQQ or Nasdaq 100 as their underlying assets.
From one website: “The Global X Nasdaq 100 Covered Call ETF (QYLD) follows a ‘covered call’ or ‘buy-write, strategy, in which the Fund buys the stocks in the Nasdaq 100 Index and ‘writes’ or ‘sells’ corresponding call options on the same index.”
The JPMorgan Nasdaq Equity Premium Income ETF (JEPQ) throws in some active management. The fund strategy, taken from its website, says JEPQ:
- Generates income through a combination of selling options and investing in U.S. large cap growth stocks, seeking to deliver a monthly income stream from associated option premiums and stock dividends
- Seeks to deliver a significant portion of the returns associated with the Nasdaq 100 Index with less volatility
- Constructs a long equity portfolio through a proprietary data science driven investment approach designed to drive portfolio allocations while maximizing risk-adjusted expected returns
Both funds pay monthly dividends. QYLD reports a current distribution yield of 11.63%. JEPQ quotes and SEC yield of 13.95%.
Let’s see how each has performed so far in 2023…
QYLD closed out 2022 at $15.91 per share. On May 17, it closed at $17.53. Dividends paid a total of $0.679 per share. A little math gives a year-to-date return of 14.44%.
JEPQ ended 2022 at $40.80. The May 17 close was at $46.51. Dividends paid total $1.81 per share. JEPQ has returned 18.43%.
The results show that a covered call strategy will likely lag a buy-and-hold strategy in an up market; however, in a flat-to-down market, the covered call ETFs should outperform.
— Tim Plaehn
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Source: Investors Alley