ETF QYLD: excellent option to benefit from a correction

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The recent sell-off of just about everything has been painful for many investors. 401(k) values ​​are plummeting, and those with poor (or non-existent) risk management strategies are likely seeing massive amounts of red every time they open their brokerage account. This type of selling can present opportunities, however, and right now I believe there is an opportunity in the Global X Fund – Global X NASDAQ 100 ETF Covered Call (QYLD).

I’ve covered QYLD before, most recently in July 2021, when I said it was an alternative way to gain exposure to frothy tech stocks. Today, the situation is quite different; investors are giving up on anything and everything, and again, I see QYLD as an attractive asset to layer into, but for different reasons.

QYLD – Strategy Reminder

QYLD is a covered call ETF, meaning it owns underlying stocks and sells at-the-money, or ATM, calls on its positions. I’ve covered this in more detail in my previous QYLD articles, so I won’t go over all of that. If you want more details, the introduction to fund-covered call options is a great place to spend a few minutes.

Basically, the fund gives up the upside potential of its positions by selling ATM calls, which generate income. This income is then distributed each month and has significant benefits in exchange for selling your benefit.

QYLD Fact Sheet

Fund Fact Sheet

For one, QYLD outperforms the index during sideways periods and sell-offs. There is no downside protection per se, but the income generated each month provides additional liquidity on top of what you would get from simply holding the index.

Second, you receive a monthly income that is not only quite significant at around 1% per month, but reliable. QYLD distributions are based on a variety of factors, but one of the most important is volatility. As volatility increases, option premiums increase and as a result, QYLD reaps greater rewards for selling ATM calls. More on that in a moment.

Finally, QYLD lets you execute this strategy without having to do it yourself, which would be time-consuming and potentially difficult. If you’re looking for a convenient way to generate income, this is where QYLD shines.

QYLD does not own the index itself, but does replicate the index by owning the underlying stocks, which you can see below.

QYLD Top 10 Holdings

Fund website

The names here come as no surprise, as QYLD owns them on a market cap-weighted basis, so the usual suspects appear. Despite the blind sell offs we’ve seen in recent weeks, I believe all of these names have sustainable business models with long-term upside, so I agree that these are the top holdings. If you don’t want to own a bunch of big tech, QYLD isn’t for you, and you should buy something else.

Now let’s look at the revenue generated by QYLD for the whole of 2021. Remember that QYLD pays out a distribution every month, so the sum of the columns on the right is the total distribution for the year.

QYLD Distributions

Fund website

The sum is $2.86 per share, with a large year-end payout helping to extract that figure. But even if we assume a normalized distribution for December, we’re still looking at around $2.60 per share, and on a stock price in the $22 range, that’s a return of almost 12%. This is what you buy QYLD for, because you can reinvest the proceeds and generate more distributions next month, or you can live off the income.

QYLD – Price Action and Volatility

Now, as I mentioned earlier, the fund is simply selling higher; it does not protect against sales. You can see here that the last two weeks have put an almost double-digit correction on QYLD, and its chart looks just as bad as the QQQ/Nasdaq 100.

QYLD course

Stock charts

I’m not going to review the chart except to say that the ETF is extremely oversold, but it could definitely go down. I don’t see anything to indicate the sell off is over, and even when we do get a bounce, it’s probably just that and nothing more. In other words, I think we’re going to see a period of consolidation after the next bounce, so you don’t need to rush out and buy this today unless you’re overlapping.

However, one of the reasons for potentially moving a little faster than otherwise is the movement in volatility that we have seen. It’s the VXN, which is the volatility index for the Nasdaq 100. It’s the same as the VIX for the S&P 500, just specific to the Nasdaq 100. It’s also very relevant to the QYLD discussion, as this largely determines the premiums the fund can earn on the call options it sells.

QYLD ETF prices

Stock charts

VXN hit 35 on Friday, and is almost certain to go higher than that this week with economic news and a host of big earnings reports due out. This indicates a tremendous amount of fear in the market, and it is driving option prices through the roof.

QYLD is taking advantage of this with its short long positions, so I suspect the January, February and maybe even March distributions will be larger than normal. We could easily see distributions in the range of 25 cents per share or more for this period given the increase in volatility, so QYLD’s distribution yield will be briefly above normal. Longer term, selling episodes like the ones we are currently experiencing tend to have lasting impacts on option prices as volatility is priced in for months. Again, this will benefit QYLD’s ability to generate premiums and return them to unitholders.

The bottom line about QYLD is that if you’re looking for ways to benefit from this correction, this fund is a great option. My outlook for now is that we will see a bounce, followed by a rejection at resistance, then further selling, so QYLD should outperform in such an environment. The only time the index itself is a better choice is during bull markets, and we’re far from having one yet. QYLD is a great option in markets like this, and I like it on the index for that reason.

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