The Truth About the $QYLD ETF's 12% Yield (Monthly Dividend)
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 Published On May 2, 2021

The $QYLD ETF (Nasdaq 100 Covered Call ETF) offers a 12% dividend yield, paid monthly. Naturally, it attracts a ton of income and dividend-focused investors. We're taking a closer look at this strategy to understand how these dividends are possible - and whether investors should take advantage!

00:00 - Intro
1:02 - The $QYLD Portfolio
2:37 - The $QYLD Covered Call Strategy
5:35 - The Truth About $QYLD's 12% Dividend
6:29 - $QYLD & Market Volatility
7:05 - When to Invest in $QYLD
9:08 - $QYLD, Taxes & Return of Capital
10:44 - $QYLD Alternatives

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The QYLD ETF is the Global X Nasdaq 100 Covered Call ETF. Its portfolio has two main components:

1. Investing in the Nasdaq 100 index (much like Invesco's $QQQ)
2. Writing (or selling) covered calls on their holdings

This means that investors get exposure to the high-growth Nasdaq 100 index - but the covered call strategy drastically changes the outcome compared to investments like QQQ.

A covered call is an options trading strategy that is used to generate income, hence the high 12% dividend of QYLD. Because QYLD owns the underlying holdings of the Nasdaq 100 index, it can write covered call contracts on its holdings every month.

A covered call gives someone else the right to buy your shares/holdings at a pre-determined price, called the strike price. In the case of covered calls, this is usually a price ABOVE what the assets are currently trading at. So if you don't believe a stock or fund will increase in price substantially, you can sell a covered call and earn some extra cash. If the price never surpasses the strike price, you get to keep the premium you earned from writing the covered call as well as your underlying shares!

However, if the price DOES increase over the strike price, the buyer of your covered call contract can exercise the contract. This forces you to sell your holdings to them at the strike price - even if the stock price is above the strike price. Therefore, it limits your potential profits if prices go up. You'd still get to keep your cash premium, but you'd be selling your shares.

This is what QYLD does with the Nasdaq 100 index. However, it has some unique strategies:

1. Writing at-the-money contracts (contracts with a strike price closest to the current index price)
2. Contracts are written (and expire) on a monthly basis
3. Contracts can't be exercised early - only at expiration

This strategy has some implications for investors:

1. They almost guarantee NO price appreciation - the covered call strategy eliminates most of the potential profits from growth of the Nasdaq 100 holdings
2. Almost all of the returns will come from dividends

In a volatile market, premiums will be higher, meaning the QYLD dividend will be higher. Otherwise, volatility doesn't matter too much to the fund, since the contracts can only be exercised at expiration (any other movements throughout the month can't be acted on).

This means there are 3 potential outcomes:

1. The market goes down - QYLD keeps its options premium, but loses NAV. The dividends given to investors should lessen or balance out these losses.
2. The market stays flat - QYLD keeps its options premium and underlying holdings. Investors get to earn returns through dividends when the market has traded sideways.
3. The market goes up - QYLD keeps its options premium, but misses out on additional returns from the underlying holdings. In this case, investors are better off with QQQ.

Be warned with QYLD taxes:
Ordinarily, the strategy is taxed at a 60% long-term capital gains rate and a 40% short-term capital gains rate. Recently, QYLD has been distributing a nearly 100% return of capital, which is technically tax-deferred.

There are some alternatives to this strategy:

1. Write your own covered calls on QQQ - this gives you more control and lowers your costs, but requires 100 shares of QQQ.
2. Invest in QYLG - a blend of QQQ and QYLD, it writes covered calls on 50% of its holdings (QYLD does 100%), which mirror the Nasdaq 100 index.

#QYLD #DividendInvesting #DividendETF

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DISCLAIMER: NOT FINANCIAL ADVICE.
The content in this video should not be used as the basis for any investment decision, as it is for entertainment purposes only. Additionally, some of the links contained in this description are affiliate links. I may earn a commission should you choose to purchase or sign up at the links provided.

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