QYLG: Covered Call Writing Done For You…But Is It Worth It?
QYLG executive summary
- QYLG is a relatively new fund launched in October 2020. It’s not off to a great start, with performance to date below inflation, meaning investors would have lost money in real dollars.
- QYLG did slightly ‘beat’ one relevant benchmark, QQQ, a proxy for the Nasdaq 100 which QYLG sells covered calls against, but we’re not confident this trend will continue.
- We find that investors appear to pay a high price across ETFs for seeking current income.
QYLG basics: what exactly is it?
QYLG is an exchange traded fund (ETF) offered by Global X.
It seeks investment returns by writing covered calls for, on average, 50% of the Nasdaq 100 at a time (by total value). Specifically, it seeks to generally replicated the yield and performance of the Cboe Nasdaq 100 Half BuyWrite V2 index.
More simply, it seeks to generate current income, rather than seek long term larger gains.They do this by purchasing (or continuning to hold) securities in the Nasdaq 100 each month, then, also mostly, writing (selling) call options corresponding to those securities.
While the exact math and mechanics of how a covered call writing options strategy works, in laymans terms, it’s essentially betting that the underlying security will not go up by as much as current price of the security plus the premium paid for the option and fees.
QYLG: performance to date has been disappointing
While this ETF has not been around for very long, it was only launched in October 2020, performance to date has not been very exciting. Adjusting for inflation, which has been high, if an investor had invested $10K at inception, a portfolio would only have ~$11,061 today, or ~$9,700 in real dollars. While the yield of 6.24% initially looks promising, since inflation was so high during the performance period, an investor would have actually lost money on a real dollars basis.
Note: we only looked at performance since exception, we did not run a backtest since it would be quite complex to do so with this strategy and since it’s beyond the scope of this article.
Performance: QYLG vs. QQQ vs. VOO
Since this fund doesn’t have an obvious benchmark to compare to, we compare it to the underlying index it’s writing covered calls against – the Nasdaq 100 (by using Invesco’s QQQ as a proxy). We also compare it to our usual gold standard benchmark we compare everything to – the S&P500 (by using VOO as a proxy, as usual).
Performance: QYLG vs. QQQ
While it looks like an investor would have been better off buying and holding QYLG compared to QQQ, we’re not very confident that trend will last. Since technology stocks, on average, tend to have very high growth we think that eventually that will outpace writing covered calls to generate income now and miss out on the upside. Time will tell, but for this short time period, QYLG did ‘win.’
Performance: QYLG vs. the S&P500 (VOO)
QYLG fared much worse when compared to VOO. Investing in VOO instead of QYLG would have yielded an investor a more than double CAGR of ~10.3% compared to QYLG’s ~4.4%. VOO would have done this for about the same volatility as well, which we see borne out in the VOO’s sharpe ratio of 0.55 to QYLG’s 0.27 and Sortino ratio of 0.86 to 0.39. We also note that diversification benefits are likely to be low, since the market correlation is high at 0.94.
Performance: what did it look like?
Again recognizing that we’re only looking a short time period here, we’re struck, as we often are by how much better off an investor would have been by sticking with the S&P500. We’re long term believers in Technology, though, and believe QQQ will outpace VOO over time (as it has done if you look at their head to head performance over a longer time horizon). But, you never know!
Focus on: what might we invest in, instead?
The methodology assumes that all dividends and distributions are reinvested. It appears that investors pay a much higher price then we expected for seeking current income, instead of investing in securities which might have more long term appreciation.
We looked at 5 other high income ETF ideas, including high yield bonds, REITS, and extended duration treasuries, and all faired poorly compared to our S&P500 VOO benchmark except for Vanguard’s high yield offering, VYM. The performance period was since 2010. We’d need to do more analysis before investing, but VYM does look interesting based on this initial quick screen.
Of course, if an investor is really focused on maximizing income in the short term, and is ok with doing so at the potential and likely reduction of future gains, than that investor might still consider one of these funds.
Note that the final balance numbers in the table are actual dollars, while the final balancesin hte chart are inflation adjusted.
QYLG: basic stats
QYLG’s yield (TTM) of 6.24% is high and attractive by historical standards, but the time it’s been in existence has been one of very high inflation, so we doubt this yield would have even kept pace with inflation.
It’s a small fund with only ~$65M of assets under management (AUM) at writing.
While the expense ratio of 0.6% appears reasonable for a strategy that needs to be so actively managed, we would like to see better performance to warrant that high of a fee.
Bottom line: are we investing?
It’s young enough that we’re going to keep an eye on it and see how it performs over the next couple of years.
Cody is the founder and owner of Personal Finance Guru. His day job is as a management consultant at one of the Top 3 firms (think Mckinsey, Bain), where he advises Fortune 500 C-suite clients on their most important and pressing business problems. He completed his business education at Harvard Business School.
After seeing the lack of personal finance education for regular people, Cody started the website with the mission to provide everyone access to information that will help them achieve their financial goals.
Cody approaches personal finance from a maximalist perspective, shunning typical advice around simply not buying a cup of coffee instead of more effective methods like investing in yourself to quickly grow your income.
He believes in saving money and investing for the future, but he also knows that you need to enjoy life today. That’s why Cody approaches money with a sense of humor and a positive attitude. He knows that if you’re not having fun while you’re growing your wealth, then what’s the point?
Cody approaches life with the same gusto that he brings to personal finance. He loves to travel and experience new cultures, and he is an avid reader and learner. He also enjoys playing sports (especially tennis) and spending time with his family and friends.