THIS IS AN ADVERTISING FEATURE
Against a backdrop of higher valuations, covered call option strategies can provide opportunities to hedge positions and generate current income.
Covered Call Basics
Covered call strategies involve purchasing equities and selling a corresponding call option on those assets. A call option gives the buyer the right, but not the obligation, to buy a security at a pre-determined strike price within a given time frame. The call option strike price can be customized to the investor’s liking. It can be at the money (ATM) if an investor is willing to give up all of the security’s upside potential, or out of the money (OTM) if the investor would like to retain more of that upside potential. The tradeoff is that an ATM call option will generate higher premiums compared to an OTM call option.
The Global X Nasdaq 100 Covered Call UCITS ETF is an index fund that operates a rules-based investment policy, including a covered call option overlay. QYLD’s covered call strategy works in the same way that it might for an individual investor who wants to maintain holdings on a single equity and then write calls on that position to generate income. QYLD simply uses the broader Nasdaq 100 Index as its reference asset and writes its call options against the broader index in exchange for the options’ premiums.
Rather than purchase an ETF that tracks the Nasdaq 100, QYLD purchases the many components that comprise the index. As a result, the fund can maintain a high level of liquidity, and it is not subjecting itself to the additional expenses that might be associated with purchasing another ETF. Also, the strategy keeps the fund flexible in that it can purchase or sell the stock of individual companies in order to maintain an overall weighting that is as close as possible to its equity index, the Nasdaq 100.
QYLD operates a call-write strategy to cover 100% of its notional portfolio by selling Nasdaq 100 (NDX) call options that cover the entire Nasdaq 100, as opposed to writing call options on all the stocks that make up the index individually. The fund uses European style options that cannot be executed by the purchaser until the contract reaches its expiration date. These contracts are cash settled, so the fund maintains its systematic approach, writing at-the-money options monthly, and investors do not need to be concerned with how the fund can maintain its holdings at a similar weight to that of the index.
Each month, the Global X Nasdaq 100 Covered Call UCITS ETF writes call options with strike prices that are at the money, which means that at initiation the strike price of the calls written is equal to the value of the underlying index. If a contract with a strike price that is precisely at-the-money is not available to be sold, the fund will write its call options at the closest possible strike price to the reference index’s value that is out of the money. The strategy allows the fund to attract the highest possible premiums for its written calls without selling contracts that are already in a position to potentially be exercised. From there, the fund proceeds to implement its policy of distributing half of the premiums it has received or 1% of the fund’s net asset value, whichever is lower. The balance of the premium is reinvested back into the fund.
How QYLD Might Perform in Various Scenarios
In theory, the premiums that QYLD receives position it to outperform the Nasdaq 100 most effectively when the index trades in choppy, flat, and declining directions.
Covered Call Strategies Can Help Investors Round Out Their Portfolios
Investors can pursue wealth generation in many ways, beyond traditional allocations like the 60/40 equity and fixed income structure. A strategy like QYLD can offer investors a potential stream of current income and a diverse group of holdings on which to base its risk-adjusted returns. With a portfolio that follows the rules set forth by the Cboe Nasdaq 100 BuyWrite v2 Index and daily disclosure of portfolio holdings, QYLD also allows investors to be fully aware of the fund’s exposures. The fund trades the upside potential associated with its reference equity index to create premium income, so it may also act as a functional portfolio diversifier and hedged equity solution on multiple levels.
Diversification Potential
Operating within the ETF sleeve, covered call option strategies like QYLD have the potential to reduce the beta coefficient associated with a basket of investments like the Nasdaq 100. Index funds can inherently provide this because they typically take positions on a broad base of assets.
When it comes to conventional income accounts that have more of a tendency to seek out high dividend-paying stocks, QYLD offers allocations toward sectors that they might have deemed unsuitable. By seeking to monetize the volatility associated with these sectors, QYLD’s ability to acquire premium income creates an opportunity to pursue these underexposed positions.
Visibility and Risk Mitigation Potential
Another key attribute associated with systematic covered call funds like QYLD is their straightforward, rules-based nature. Passively managed products typically follow a strict set of rules that establish specific exposures over an explicit time frame. Relative to a strategy that employs active management without daily holdings disclosure, this might empower investors to gain a better understanding of precisely where fund allocations are being made. The uniformity of a rules-based investment strategy can allow for seamless implementation into a broader portfolio, where risk-adjusted return metrics can be considered and weighed accordingly. It can also help to save the time that researching more complex strategies can require.
Ability to Work Within an Equity Growth Portfolio
Because QYLD seeks a minimal level of capital appreciation in exchange for option premiums, the fund offers a value proposition that can be utilized through various allocation combinations. For example, an investor may be able to implement QYLD within a broader growth portfolio as a means to obtain a growth and income blend, depending on his/her risk and yield appetite. The ability to be this nimble within an index tracking strategy that maintains a 100% coverage ratio with NDX call options can support an investor’s ability to modify their respective portfolios in a variety of different ways.
Conclusion: QYLD is a Total Return Vehicle Designed for a Variety of Investors
Writing index call options against 100% of the value of its portfolio, QYLD forgoes the possibility of realizing the capital appreciation generated by the Nasdaq 100 Index. The fund operates this way so that it can attract the highest possible premiums in exchange for calls written. It then makes its distributions from this stockpile in an effort to produce a competitive yield.
Investors can use the income that may be generated by a position in QYLD at their discretion. Duplicating exposures to Nasdaq 100 constituents might seem counterintuitive at first glance when trying to mitigate risk. However, an at-the-money covered call strategy like QYLD seeks to monetize the index’s volatility to create income that can act as somewhat of a hedge. That potential income can also supplement an existing growth strategy while offering a portfolio a positive relationship with volatility that other investment vehicles may not provide.
Capital at risk: The value of an investment in ETFs may go down as well as up and past performance is not a reliable indicator of future performance.
The Global X UCITS ETFs are regulated by the Central Bank of Ireland.
This is a marketing communication.
Please refer to the relevant prospectus, supplement, and the Key Information Document (“KID”) of the relevant UCITS ETFs before making any final investment decisions.
Investors should also refer to the section entitled “Risk Factors” in the relevant prospectus of the UCITS ETFs in advance of any investment decision for information on the risks associated with an investment in the UCITS ETFs, and for details on portfolio transparency. The relevant prospectus and KID for the UCITS ETFs are available in English at www.globalxetfs.eu/funds.
Investment in the UCITS ETFs concern the purchase of shares in the UCITS ETFs and not in a given underlying asset such as a building or shares of a company, as these are only the underlying assets that may be owned by the UCITS ETFs.
A UCITS ETF’s shares purchased on the secondary market cannot usually be sold directly back to a UCITS ETF. Investors must buy and sell shares on a secondary market with the assistance of an intermediary (e.g. a stockbroker) and may incur fees for doing so. In addition, investors may pay more than the current net asset value when buying shares and may receive less than the current net asset value when selling them. Changes in exchange rates may have an adverse effect on the value price or income of the UCITS ETF.
Past performance of a UCITS ETF does not predict future returns. Future performance is subject to taxation which depends on the personal situation of each investor, and which may change in the future. Neither past experience nor the current situation are necessarily accurate guides to the future growth in value or rate of return of a UCITS ETF.
Investment may be subject to sudden and large falls in value, and, if it is the case, the investor could lose the total value of the initial investment. Income may fluctuate in accordance with market conditions and taxation arrangements. The difference at any one time between the sale and repurchase price of a share in the UCITS ETF means that the investment should be viewed as medium term to long term.
Any investment in a UCITS ETF may lead to a financial loss. The value of an investment can reduce as well as increase and, therefore, the return on the investment will be variable.
Global X ETFs ICAV is an open-ended Irish collective asset management vehicle issuing under the terms of its prospectus and relevant supplements as approved by the Central Bank of Ireland and is the issuer of certain of the ETFs where stated.
Global X ETFs ICAV II is an open-ended Irish collective asset management vehicle issuing under the terms of its prospectus and relevant supplements as approved by the Central Bank of Ireland and is the issuer of certain of the ETFs where stated.
Communications issued in the European Union relating to Global X UCITS ETFs are issued by Global X Management Company (Europe) Limited (“GXM Europe”) acting in its capacity as management company of Global X ETFs ICAV. GXM Europe is authorised and regulated by the Central Bank of Ireland. GXM Europe is registered in Ireland with registration number 711633.
Communications issued in the United Kingdom and Switzerland relating to Global X UCITS ETFs are issued by Global X Management Company (UK) Limited (“GXM UK”), which is authorised and regulated by the Financial Conduct Authority. The registered office of GXM UK is 77 Coleman Street, London, EC2R 5BJ, UK. Information about GXM UK can be found on the Financial Services Register (register number 965081).
Information for Investors in Switzerland
This is an advertising document. The state of the origin of the fund is Ireland. In Switzerland, the representative is 1741 Fund Solutions AG, Burggraben 16, CH-9000 St.Gallen. The paying agent is Tellco AG, Bahnhofstrasse 4, 6430 Schwyz.
The prospectus, the key information documents or the key investor information documents, the articles of association as well as the annual and semi-annual reports may be obtained free of charge from the representative.
Past performance is no indication of current or future performance. The performance data do not take account of the commissions and costs incurred on the issue and redemption of units.
