Editor's note: This article was corrected to change Recton to Recon.
NEW YORK (TheStreet) --The Recon Capital NASDAQ-100 (QYLD) started trading last week and is the latest in a small, recent wave of covered-call exchange-traded funds.
QYLD will track the Nasdaq 100 BuyWrite Index which owns the Nasdaq 100 index and sells covered, index calls every month that are at the money or slightly out of the money depending on the available strike prices.
Selling covered calls is typically done as a conservative strategy to generate income and mute the impact of smaller market declines. The opportunity cost is that a covered-call strategy will lag a huge market rally.
The big idea with covered-call funds is that they are intended to smooth out the volatility of a full market cycle by going down less than the market during downtrends and going up less during rallies. That is similar to the many low volatility ETFs that have started trading in the last couple of years and can apply to dividend funds which have also proliferated in recent years.
Instead of selling calls against a broad index such as the Nasdaq Composite or the S&P 500, low volatility funds will modify a broad index such as the PowerShares S&P Low Volatility Portfolio (SPLV) which owns the 100 least volatile stocks in the S&P 500. Other low volatility funds employ other methods to reduce volatility.
Dividend funds will typically focus on higher yielding stocks or stocks that have a track record of increasing their dividends. Dividend-paying stocks tend to have lower betas -- a measure of volatility where the lower the number, the lower the volatility -- and so the dividend funds tend to be less volatile than the broad market.