High Monthly Yield from Covered Call ETF

06/26/2017 2:56 am EST

Focus: FUNDS

Mark Salzinger

Editor and Publisher, The No-Load Fund Investor

It is difficult to find attractive income these days from investments with good risk-return profiles. While high-quality bonds are unlikely to default, or even suffer credit downgrades, they have puny yields, notes Mark Salzinger, editor of The No-Load Fund Investor.

Meanwhile, though funds and ETFs for high-yield corporate bonds generally offer a little more than 5%, their yields relative to those of U.S. Treasurys of similar maturities (so-called yield spreads) are well below average. This hurts their potential for strong total return over the foreseeable future.

Therefore, it makes sense to look for yield in other places—not overseas, necessarily, because yields are not attractive in most places outside the U.S., either—but rather in slightly more sophisticated investment strategies.

Investors intrigued by an options strategy but interested in the potential for slightly higher total return may want to consider Horizons NASDAQ 100 Covered Call ETF (QYLD). The fund offers a strategy for getting high monthly yields — above 7% — using covered calls.

Because its underlying index is more volatile than the S&P 500 (thanks partially to the dominance of technology stocks in the NASDAQ 100), the options premiums can be greater. Also, this ETF pays out the premiums as income, resulting in a higher published yield.

The ETF holds the NASDAQ 100 Index and sells the appropriate number of calls expiring in about a month, and with a strike price slightly above the current price of the index. So far this year, QYLD has gained 9.1%.

Because the fund hasn’t been around long, we can’t really judge its risk, especially during scary times. But over the past three years, its overall volatility has been about 20% lower than that of the S&P 500, while its total return has been about a 25% less.

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