The various Nasdaq-100 index ETFs are a popular holding for growth investors. With a heavy focus on tech, these ETFs provide exposure to industry giants, including all of the Magnificent Seven stocks.
However, there’s one drawback: income. The yield on traditional Nasdaq-100 ETFs is paltry, as these companies typically prefer to reinvest profits into research and development, acquisitions, or stock buybacks rather than paying dividends.
If you’re looking for income but still want exposure to the Nasdaq-100, the solution may be Global X Enhanced NASDAQ-100 Covered Call ETF (TSX: QQCL).
As of January 16, it delivers an impressive 11.81% distribution yield with decent historical price appreciation, too. Here’s how it works.
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QQCL under the hood: Covered calls
The first component of QQCL is its covered call strategy, which involves owning the stocks in the Nasdaq-100 and selling call options on them.
Here’s how it works: by selling covered calls, the ETF converts potential future price appreciation into immediate income. The trade-off? You sacrifice some of the upside gains from these stocks in exchange for a higher yield.
Unlike some covered call ETFs that follow a rigid approach, QQCL uses an active strategy. This means the fund’s managers have the discretion to tactically decide when, how, and on which stocks to sell options, maximizing the income potential based on market conditions.
It’s worth noting that the Nasdaq-100 is a highly volatile index, and that’s a good thing for QQCL’s strategy. Higher volatility leads to larger options premiums, which helps generate its double-digit yield.
QQCL under the hood: 1.25 times leverage
To further boost its yield and offset the capped upside introduced by its covered call strategy, QQCL employs leverage.
Specifically, the fund borrows up to 25% of its net asset value (NAV) to invest more in the Nasdaq-100. In essence, this means you’re effectively owning 125% of the Nasdaq-100 when you invest in this ETF.
While leverage can enhance returns, it comes with its downsides. The interest on the borrowing adds to the fund’s expenses, contributing to a relatively high management expense ratio of 2.35%.
Additionally, leverage amplifies losses if the index declines, making this ETF more volatile than its unleveraged counterparts.
Still, this leverage is a crucial component of QQCL’s high double-digit yield, especially when paired with its covered call strategy. It’s a trade-off for investors seeking elevated income and willing to accept the associated risks.
