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A Nasdaq 'Covered Call' ETF Grows -- Journal Report

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03/08/2020 | 10:16pm EDT

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 bets.

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 reports@wsj.com.

 

Stocks mentioned in the article
ChangeLast1st jan.
APPLE INC. -0.10% 317.94 Delayed Quote.8.27%
BYD COMPANY LIMITED -1.47% 43.5 End-of-day quote.11.97%
DJ INDUSTRIAL -0.07% 25383.11 Delayed Quote.-11.00%
INVESCO LTD. -1.97% 7.97 Delayed Quote.-55.67%
MICROSOFT CORPORATION 1.02% 183.25 Delayed Quote.15.03%
MORNINGSTAR, INC. 1.93% 153.32 Delayed Quote.1.33%
NASDAQ 100 1.47% 9555.524843 Delayed Quote.9.42%
NASDAQ COMP. 1.29% 9489.872484 Delayed Quote.5.77%
S&P 500 0.48% 3044.31 Delayed Quote.-5.77%
WORLD CO., LTD. -3.03% 1567 End-of-day quote.-41.77%
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