QQQX Or QYLD: Which Fund Makes More Sense (One Year Later)

Summary

I reviewed QQQX and QYLD and came to the conclusion that in September 2020 QQQX made more sense.

Looking where shares are now conservative investors would be better off shifting their portfolio to QYLD because I see far less market upside than I did one year ago.

Both funds are similar in composition (both focus on the Nasdaq-100) but QYLD is a overwrite fund that uses covered calls over 100% of the portfolio.

QQQX isn’t a bad investment for retirees but the potential upside isn’t there to justify buying at all-time highs.

The distribution paid is primarily from option fees which is how these funds can pay such a hefty yield on holdings with extremely low yields.

DNY59/E+ via Getty Images It was roughly 14 months ago I wrote the article QQQX Or QYLD – Looking At Which Fund Makes More Sense and came to the conclusion that Nuveen Nasdaq 100 Dynamic Overwrite Fund ( QQQX ) was the better investment choice when compared with Global X Nasdaq 100 Covered Call ETF ( QYLD ). Here is how that has played out since September 11, 2020.
Now, is important to remember that these funds are not created to track the exact performance of the NASDAQ index especially when we consider that these funds represent conservative plays on the index that are focused on generating income in the form of dividends.

As discussed in the previous article, I believed that QQQX represented the greatest investment potential (of the two funds) at the time because we were looking at a market that was still recovering from the impact of COVID shutdowns in many portfolios were still struggling to get back to pre-pandemic levels (specifically when it comes to account balances). The graph above demonstrates that this approach was accurate as QQQX handily outperformed QYLD over the last 15 months.

For example, John and Jane’s (the couple I have regularly written about over the last four years) had a Taxable account balance of $384,000 by the end of September 2020. This compares to an account balance at the end of January 2020 balance of $433,000. Since then, the Taxable account balance skyrocketed to a balance of $506,000 at the end of November 2021 (this is how much the balance grew even after $14,000 was used for John and Jane’s Traditional IRA contributions). If I’m being perfectly honest, I expected the market to perform well but the growth experienced exceeded my expectations. Why Do I Suggest Shifting To QYLD?

For anyone who reads my articles about John and Jane, they will know that I have a tendency to carry a modest amount of cash on hand because I believe in the value of taking advantage of events in the marketplace which allow us to buy shares at a significant discount to normal pricing. With that said, John and Jane still have most of their wealth actively invested because it would be foolish to think that we can somehow time the market for these opportunistic events. Like anything in life, there needs to be a balance between maintaining cash for opportunistic events and remaining invested in order to generate the income needed for John and Jane to enjoy a comfortable retirement.

With this in mind, I view QYLD as the superior option at present because the heavy use of covered calls (100% of the portfolio) is designed to protect the value of shares when there is a major pullback. At the same time, QYLD offers a significant yield of 11.93% (more on this later). I want to be clear that I am not predicting an imminent market crash or anything along those lines but I am suggesting that the potential upside for QQQX (with a share price recently reaching its all-time high) is extremely limited and represents a poor entry point for investors.

To make this a little more clear, let’s look at the performance of both funds during 2020.
Looking at the graph above, it would be easy to assume that QQQX is a superior investment but readers need to understand that the purpose of comparing QQQX and QYLD is that they maintain similar portfolios (heavily weighted towards software and semiconductors) but they differ widely when it comes to their options strategy. QQQX focuses on selling call options that can range between 35%-75% of the notional value of the fund’s equity portfolio. The long-term target when it comes to call options is approximately 55% of the portfolio.

QYLD has a slightly different approach […]

source QQQX Or QYLD: Which Fund Makes More Sense (One Year Later)