What is QYLD and how does it work?

QYLD generates income by writing (selling) call options on the Nasdaq 100 Index, which it fully replicates by holding the underlying stocks.

This strategy is known as a "covered call".

The fund aims to provide a high monthly distribution, with a current yield of around 11-12% as of mid-2024.

However, this high yield comes at the cost of capping the upside potential of the underlying stocks.

QYLD has a relatively low beta of around 0.6, meaning it is less volatile than the overall Nasdaq 100 Index.

This is due to the income generated from the covered call strategy.

By selling call options, QYLD collects the option premiums, but must give up any gains in the Nasdaq 100 Index above the strike price of the options.

This limits the fund's upside potential during bull markets.

The fund's portfolio closely tracks the Nasdaq 100 Index, with top holdings including tech giants like Apple, Microsoft, and NVIDIA.

This provides exposure to the growth potential of the underlying index.

QYLD has a relatively high expense ratio of around 0.60%, which is on the higher side for an index-tracking ETF.

This reduces the net returns compared to simply holding the Nasdaq 100 Index.

The fund's monthly distributions are classified as "return of capital" for tax purposes, which can be more complicated for investors to report on their tax returns.

QYLD is structured as a regulated investment company (RIC), which allows it to pass through its income to shareholders without paying corporate-level taxes.

The fund's covered call strategy is implemented through a proprietary options execution process, which aims to optimize the option premiums collected and manage the trade-offs between income and upside potential.

QYLD has seen strong inflows in recent years as investors have sought out its high-yielding, risk-managed exposure to the Nasdaq 100 Index.

However, some analysts question the sustainability of its distribution level.

The fund's performance is sensitive to changes in implied volatility in the Nasdaq 100 options market, as higher volatility generally leads to higher option premiums and vice versa.

QYLD's distributions are not guaranteed and may fluctuate based on market conditions and the performance of the underlying Nasdaq 100 stocks and options.