Reducing Risk on NASDAQ 100

02/04/2015 10:00 am EST

Focus: ETFS

Kevin Kelly, of Recon Capital Partners, discusses his firm's specialty ETF which writes covered calls against the stocks in the NASDAQ 100 in order to provide upside exposure to the index, while reducing the longer-term volatility and potential downside risk.

Steven Halpern:  Joining us today is Kevin Kelly, managing partner of Recon Capital Partners.  How are you doing today, Kevin?

Kevin Kelly:  I am doing great! You know, I am down at an ETF conference and there is a lot of energy and buzz that came out of a PWC article that had commented on the space approaching $5 trillion in assets by 2020, so everyone is really excited about that momentum.

Steven Halpern:  Well, great.  We appreciate you joining us today. Now, Recon Capital Partners offers an innovative ETF that offers upside exposure to the NASDAQ 100 with the advantage of less volatility. Now, before we discuss the ETF in specific, could you give us a brief explanation as to what covered calls are and how they are used to lower portfolio risk?

Kevin Kelly:  Sure, covered calls are a very conservative option strategy where people own the underlying asset so you can have a basket of securities or you could do it on one security.  Let's take Apple for example.  

You own Apple and what you can do is sell a call against that Apple position to generate income for your portfolio, so someone pays you to buy the right to take that stock away from you at a higher price.  

A covered call is a very conservative. You own the underlying asset and you sell a call against it to lower your volatility.

Steven Halpern:  Now, with that as background, let's turn to Recon Capital Partners' ETF-the NASDAQ 100 Covered Call ETF-which trades under the symbol (QYLD).  Could you explain a little about the fund itself and the benefits that you feel it offers investors?

Kevin Kelly:  Absolutely!  QYLD, the ticker is 'options yield on the Q'-so that is a great way to remember it. But QYLD owns all 100 constituents in the NASDAQ 100.  

If you look at the NASDAQ 100, the top holdings are Apple, Microsoft, Google, QUALCOMM, Facebook, Starbucks, and Gilead Sciences, so the NASDAQ 100 is a great index to take a peek and see who are the innovative companies.  

You have great biotech company, the largest one.  You have great healthcare company. You have also a large tilt to the emerging technology space and leaders in that, so if you look; Microsoft, Apple, Google, and Tesla is in there as well.  

What the NASDAQ 100 covered call does is own all 100 constituents and it sells the index call option against that every single month and then rolls it on the third Friday of the month. We are generating monthly options premium and when we take in that premium and we distribute it out to shareholders.  

Every month, holders of record are going to get that monthly options premium in their accounts.  We repeat that process every year, so if you look at last year, we distributed 10.4% over the year from the monthly options premium that came in.

Steven Halpern: The NASDAQ 100, and in turn, your portfolio, includes a lot of technology stocks. What is your outlook for the overall technology space and could you highlight some of the individual stocks that you believe are well positioned for the coming year?


Kevin Kelly: Absolutely, so, if you take a step back and look at the technology space back in 2000, a lot of these companies were trading for high multiples, 55 P/Es plus. If you look at the NASDAQ 100 right now, it has grown in to more of a value index, but still has that growth potential.  

If you take a look at the technology space, a lot of these companies have great balance sheets and that is what we like about this index, because they're really creditworthy companies that are growing and because they are growing, they are also distributing dividends to shareholders as well.  

If you look at Apple, Apple has got a great dividend that they distribute, but they are also growing, so they are taking a lot of money that they are earning and they are still putting it back into R&D, but they are also distributing it to shareholders of record.  

Great names that we like in the technology space are Google and Facebook. One of the reasons why is because they are leading the cutting edge in to video advertising.  

If you look at the overall advertising space, they are the ones leading it, and so, that is where all of the revenue ad dollars are starting to flow. If you look at the evolution of advertising on the Internet, it is starting to go in to the video format as well as through mobile devices.  

Google is not only positioned-and Facebook as well-not only positioned to take advantage of the Web and the advertising in the video platform, but as well as in mobile.  

Those are two names that we think are really leading the charge in the technology space.  They are generating a lot of revenue and they are still growing at 20% plus.

Steven Halpern:  Is it fair to say that the NASDAQ 100 covered call ETF would be best suited for those who want exposure to the high growth potential that is offered by the NASDAQ 100, but willing to sacrifice some of the upside in exchange for also reducing the downside volatility.

Kevin Kelly: That is correct. A great way to look at it is because we are taking in monthly options premium it is kind of like what Warren Buffet does. We are selling insurance rights and we are collecting those premiums.  What that does is that lowers the portfolio volatility by 1/3.  

We are taking out 33% volatility from the NASDAQ 100 and these tend to be a higher volatile names, so you have Tesla in there, you have Starbucks, and you have Costco, so that you have got great, innovative companies, but they are also willing to take chances.  

They are growing, but to mitigate some of that exposure you do that by selling calls.  It is a lower volatility strategy, but you still have the great exposure to those names that you are very comfortable with.

Steven Halpern:  Again, our guest is Kevin Kelly, managing partner of Recon Capital Partners.  Thank you for taking the time to share your insights today.

Kevin Kelly: Thank you very much. Have a great day.

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