QQQ vs. QYLG vs. QYLD: A Look At The New Nasdaq 100 Covered Call & Growth ETF

David Dierking

There has been no shortage of new ETF targeting the Nasdaq 100 over the past several weeks. Most notable is Invesco's recent "QQQ Innovation Suite", which saw it add the Invesco Nasdaq 100 ETF (QQQM) and the Invesco Nasdaq Next Gen 100 ETF (QQQJ) to its existing heavyweight, the Invesco QQQ ETF (QQQ).

Also entering the fray recently was the VictoryShares Nasdaq Next 50 ETF (QQQN), a similar play to QQQJ with a slightly different focus.

Global X joined the party as well, but it chose to expand its covered call ETF lineup instead. The fund I want to look at here is its addition to the Nasdaq 100 ETF universe, the Global X Nasdaq 100 Covered Call & Growth ETF (QYLG).

QYLG Profile

QYLG looks a lot like other covered call funds in that it owns the entire Nasdaq 100 index and writes call options on a percentage of the portfolio in order to boost its yield.

The upside of covered call ETFs is that they typically provide yields much higher than anything you'd find in a typical dividend fund, often times offering yields of 10% or higher.

The downside is that covered call ETFs only outperform in a small subset of market environments, usually when stocks are moving sideways or down and when market volatility is low. During rising or volatile markets, the written options usually get called, forcing the fund to sell securities at below market prices. Over time, we know that stocks usually move up, making covered call ETFs a poor long-term performer.

But QYLG attempts to address that problem by focusing more on the growth aspect of the underlying portfolio and less on the income portion.

Many covered call ETFs overwrite the entire underlying portfolio. That's good for yield but often bad for upside. QYLG only overwrites 50% of the portfolio. That allows the fund to participate in more of the capital growth upside of the Nasdaq 100 while still capturing a significantly higher yield.

QYLG vs. QYLD

The obvious comparison for QYLG is the company's other existing covered call fund, the Global X Nasdaq 100 Covered Call ETF (QYLD).

You can probably infer the primary difference between the two funds just by looking at their names. QYLD overwrites 100% of the underlying portfolio, whereas QYLG only overwrites 50%.

That would put QYLG squarely between QYLD and QQQ in terms of both capital growth potential and yield.

With QYLG being such a new fund and having virtually no track record to speak of, we can still put QQQ and QYLD side-by-side to get an idea of what to expect.

QQQ_QYLD_chart

I'll use just the 1-year return for these two products since it includes both bull & bear markets and I still think it paints a good overall picture. As you can see, the growth-oriented QQQ has returned nearly 50% over the past year, despite a bear market that cut more than 30% from the index in the first quarter.

QYLD, on the other hand, returned a meager 5%. This is exactly what I was referring to when I talked earlier about securities getting called away during a bull market rally. It significantly cut into the upside of the fund.

On the flip side, it did provide some downside protection in February and March, but not protection that shareholders may have been hoping for.

QQQ_QYLD_chart-2

The yield, however, is what's turned QYLD into a $1.3 billion fund. Its yield has consistently been in the 10-12% range, whereas QQQ yields next to nothing.

Which fund of the three you might choose depends entirely on your objective - growth or yield.

Conclusion

We don't know exactly what QYLG will look like just yet, but it's fair to assume that it will land somewhere between QQQ and QYLD.

Overall growth potential will still be limited and it's unlikely to come near the performance of QQQ in a raging bull market, but it might be a nice middle ground for more volatile or sideways markets.

With QQQ yielding just 0.6% and QYLD yielding 11.4%, I think it's fair to think that QYLG's yield, once officially published, will be somewhere in the 5-6% range.

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