Option ETFs’ Growing Popularity

As options have grown in popularity, so have the ETFs around them.

Although a relatively small amount of search volume amongst financial pros, retail traders have been looking at different ETF options (pun intended) to boost their income.

The most searched ETF in the group is the Global X NASDAQ 100 Covered Call ETF (QYLD).

Odd as it sounds, the ETF’s 12% dividend is at the lower end of the group.

But it’s important to look beyond the yield to get a full picture of what these ETFs, particularly the QYLD, have to offer.

Key Facts About QYLD

• Net assets: $7.7 billion
• 12-month trailing yield: 12.01%
• Inception: December 12, 2013
• Expense ratio: 0.60%
• Number of holdings: 103

A covered call involves buying 100 shares of stock and simultaneously selling a call option (the right to buy those shares at a given price until a given expiration date) against them.

Although most investors do this with individual stocks, this can be done with ETFs and indexes as well.

The QLYD employs this strategy with the Nasdaq 100 using one-month option expiration contracts.

Source: Globex

While this is typically done as one transaction, simultaneously buying the stocks and selling the calls, it appears the ETF simply holds the stocks and sells the calls against them on a rolling basis, helping to keep transaction costs down.

Performance

Covered calls add income by paying a premium every time you sell a call option. However, they limit the capital gains potential. That’s not a problem in a sideways or falling market. But, it underperforms in bull markets.

Source: Globex

Consequently, the QYLD significantly underperforms the Nasdaq 100 over extended periods of time to generate income and reduce volatility.

Competition

Several other options related ETFs exist for other indexes, commodities, and strategies.

Below are the top ones based on our TrackStar search data:

• Global X Russell 2000 Covered Call ETF (RYLD): Similar to the QYLD, the RYLD is a covered call ETF against the Russell 2000 small-cap index.
• Credit Suisse X-Links Crude Oil Shares Covered Call ETN (USOI): The USOI is an ETN, which means it’s a debt-secured note issued by Credit Suisse. It mimics owning shares of the USO ETF and then selling calls against those shares. So, it’s a derivative of a derivative fund.
• Amplify YieldShares CWP Dividend & Option Income ETF (DIVO): DIVO is an actively managed portfolio of high-quality dividend-oriented stocks that then have covered calls sold against them.
• Credit Suisse X-Links Silver Shares Covered Call ETN (SLVO): Similar in structure to the USOI, the SLVO is a debt note that tracks a strategy that owns silver and sells covered calls against the asset.

What you’ll immediately notice is the high dividend yields paid out by the USOI, RYLD, and QYLD. However, dividend yields aren’t indicative of performance. In fact, the USOI, which has the highest yield, has the worst performance.

Our Opinion 10/10 

While covered call strategies typically underperform the broader index, they can be useful for investors looking to moderate volatility in their portfolio while generating income.

The QYLD is a great choice for this strategy, as is the RYLD. We do not recommend the ETN debt notes, given their twice-removed derivative nature.

However, we believe a better choice for most investors who want lower volatility is to simply own less of the underlying indexes.