The year 2023 is coming to an end and a new year is coming. After in decline of -19.44% in 2022, the S&P500 climbed 24.73% in 2023. The Nasdaq had an even more pronounced spread since it fell by -33.10% in 2022, then bounced by 44.52% in 2023. The investment community seems to have a love-hate relationship with the Global X Nasdaq 100 Covered Call ETF (NASDAQ:QYLD), because the idea of investing in income offends many people. Income investing is not the right strategy for everyone, but it is applicable to some strategies. The debate between investing for capital appreciation versus income will continue to be discussed for decades, but it should be remembered that each investor’s situation is different, which may create different investment goals. I’m a big fan of index investing and have 100% of my 401k in a standard S&P index fund. My goals are different from those of the next investor, and this may not be the right approach for another individual, simply because generating income from a portion of my invested capital fits my needs. After a terrible 2022, QYLD appreciated 9.33% in 2023 and generated $2.04 per share in distributed earnings. QYLD started the year at $15.86, so investors who added QYLD in early 2023 generated a return on capital of 12.88% and saw the underlying investment grow by 9.33 %. QYLD doesn’t operate this way every year, but its strategy allows it to generate a continuous stream of income for its investors without having to sell shares to generate income. Although new high yield investment products have been introduced to the market that I invest in, I am still a fan of QYLD.
Following my previous article on QYLD
On October 17, I wrote an article about QYLD (can be read here), which compared QYLD to the Global X S&P 500 Covered Call ETF (XYLD) and the Global X Russell 2000 Covered Call ETF (RYLD) on a cumulative basis. I also explained why I am bullish on QYLD through the end of 2023 and how I believe the economy is well organized for its underlying assets. I wanted to follow up on this article, take a look at QYLD’s performance in 2023, and explain why I prefer the idea of holding a portfolio of income-generating assets to generate income rather than using an approach where I sell shares of an investment.
2023 was a good year for the markets and QYLD delivered on its targets
QYLD is not designed to replicate the performance of the Nasdaq. If your investment objective is capital appreciation, then QYLD will likely not be an attractive investment choice. QYLD has built its underlying assets by investing in the companies that make up the Nasdaq 100. Its primary goal is to generate immediate income on a monthly basis by writing covered calls against its positions. Capital appreciation is a distant secondary goal, as much of the upside is exchanged for immediate income when covered calls are written. Much of the potential upside is capped in an appreciating market due to QYLD’s writing of one-month call options on the Nasdaq 100 Index that are covered by securities in its portfolio. Each option written will generally have a strike price equal to or greater than the prevailing market price of the Nasdaq 100 Index from the time it was written, thereby creating immediate income for QYLD. This is why in 2023, when the S&P rose 24.73% and the Nasdaq rose 44.52%, QYLD only appreciated 9.33% despite owning many of the same companies.
QYLD did not outperform the markets in terms of appreciation, but it achieved its primary objective of generating immediate income and its secondary objective of generating capital appreciation. QYLD used its strategy of writing covered call options on its positions on a monthly basis to generate $2.04 annualized income in 2023 with an average monthly distribution of $0.17 per share. By investing in QYLD, investors were able to generate a twelve-month (TTM) distribution yield based on the current stock price without having to sell a single share. QYLD appreciated 9.33% as markets appreciated, and investors still have the entire base of shares to continue generating income in the future. This method may not suit everyone’s investment preferences, but it is an effective method of generating income because using the options market to sell covered calls eliminates the need to generate income solely by generating dividend income.
While QYLD achieved its goals in 2023, it also added another year to its distribution history. Since its creation, QYLD has distributed income to its shareholders over the past 120 months. QYLD went public on 12/16/13 at $25 per share, and since then, shares have distributed $23.31 to its investors through monthly distributions. QYLD effectively generated 93.25% of its initial stock price in distributed income if distributions were taken in cash rather than reinvested. Since its introductory price of $25, QYLD shares have fallen -30.64% (-$7.66) to $17.34, but the current value of the distributed earnings and current stock price are of $40.65, which represents a return on investment of $15.65 or 62.61% on the initial share value. .
Why I allocate capital to income-producing assets and prefer the idea of generating income from distributions or dividends rather than selling stocks to make income
I have a hybrid approach to investing, and while it doesn’t work for some investors, it works for me. Outside of retirement accounts, I allocate capital to a basket of ETFs, big tech, growth stocks, and income-generating stocks. I’m creating an income stream through income-generating stocks, ETFs, and CEFs that I hope will cover my living expenses in retirement without having to touch my other investments. I would prefer to generate a diversified income stream rather than relying on selling stocks to generate income because markets are unpredictable and too much is out of our control. We cannot control market dynamics, macroeconomic factors or geopolitical tensions. If you had purchased 1,000 shares of QYLD when it was founded in late 2013, along with $25,000 of QQQ and sold shares of QQQ to replicate the income generated by QYLD on an annual basis, the investment in QQQ would have been better off until now. ‘now. I do not dispute this fact at all. My main concern is that we haven’t had two consecutive negative years on the Nasdaq since 2001, and that it will eventually happen again. Although it is rare, since 1972, we have experienced 2 negative years on the Nasdaq: 1973 and 1974, then 2000 and 2001, and again in 2001 and 2002.
Fortunately, we have experienced many up cycles and, in recent years, the Nasdaq was positive from 2012 to 2017 and again from 2019 to 2021. Market appreciation has lessened the number of shares needed to sell to generate an individual’s desired income, but we have not had to dip into our assets for two or more negative years since 2001. The main reason I prefer to build an income stream that is not based on selling assets is that I cannot time the markets and there is factors beyond my control that impact the markets. While unlikely based on decades of data, there will likely come a time when we experience at least two consecutive years of declines, if not more. When markets are falling, more shares must be sold to generate the same amount of income as when markets are stable or appreciating. I don’t want to be in a position where I have to draw on my assets for several years of negative earnings to generate income. I would prefer to have a basket of assets that generate continued income during economic downturns. If you have income-producing assets that generate income without having to sell shares, you won’t have to worry about running out of shares to sell to produce income. QYLD has proven it can generate double-digit annual returns, and that’s why it’s in my income-generating portfolio. Stock prices can fluctuate and currently the stocks have decreased but my share count is not decreasing, in fact it is increasing because all the income I produce is reinvested to generate more income eventually on a monthly basis .
Risk of investing in QYLD
Although I use QYLD as part of an income-generating strategy, investing involves risks. Since QYLD sells covered calls, you risk underperforming the market because its upside potential is capped. QYLD will follow the Nasdaq to the downside, and while it might generate additional revenue due to volatility, it will not share the upside to the extent that the stock requires. The amount of income generated fluctuates and investors cannot count on a certain amount of income generated monthly.
All investment strategies are different and QYLD is aimed at investors focused on producing income. I am bullish on QYLD as a component of an income producing strategy as it has produced 120 consecutive months of monthly distributions. QYLD does not rely on dividend harvesting to generate income, and its covered call strategy has been effective during different market cycles and macroeconomic conditions. QYLD shares have rebounded from their 2022 lows, and I think 2024 will be similar to 2023 for QYLD. I expect it to appreciate between 5% and 10% while generating a low double-digit return.