Global X Nasdaq 100 Covered Call Complex ETF (ASX: QYLD)

The Global X Nasdaq 100 Covered Call ETF (QYLD) offers an innovative yield-generation strategy by combining exposure to the Nasdaq 100 with a disciplined buy-write methodology. By purchasing the stocks within the index and selling corresponding monthly call options, the fund generates immediate premium income, providing a distinct solution for investors seeking cash flow from typically low-dividend technology leaders.

This approach is particularly resilient during volatile or sideways-trading markets, as rising volatility and interest rates often lead to higher option premiums. While this strategy caps potential upside during strong bull markets, the income received serves to mitigate drawdowns and enhance total returns in less certain environments. Tracking the Cboe Nasdaq-100 BuyWrite V2 Index, QYLD provides a rules-based, fully replicated portfolio that functions as a natural hedge, transforming the growth-oriented Nasdaq 100 into a powerful vehicle for consistent income and geographical diversification.

The Global X Nasdaq 100 Covered Call ETF (QYLD) follows a “covered call” or “buywrite” strategy, in which the fund buys the stocks in the Nasdaq 100 Index and “writes” or “sells” corresponding call options on the same index to generate income over and above dividends. QYLD seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the Cboe Nasdaq-100 BuyWrite V2 Index.

QYLD seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the Cboe Nasdaq 100 BuyWrite V2 Index. The Cboe Nasdaq 100 BuyWrite V2 Index is designed to represent a hypothetical buy-write strategy. The “long” Nasdaq 100 Index component and the “short” Covered Call Option component are held in equal notional amounts. 

• Covered call strategies are a well-known method for generating yield.
• When markets are volatile, options premiums tend to rise, generating higher income for options sellers.
• Call option premiums rise when interest rates rise.
• Call option premiums tend to be higher for low dividend stocks, creating a natural hedge.

Covered call writing is an investment strategy where investors buy a stock, or group of stocks, and sell call options on them. Selling call options on stocks investors already own generates income, without facing riskier margin calls. However, it requires investors to forego upside – as a covered call portfolio can be “called away” when markets move higher.

Key covered call features:

• Generates income from selling call options on assets already owned.
• Investors are “covered” from a margin call perspective.
• Upside potential is capped, while drawdowns are mitigated by the premiums received from selling calls.
• Typically generates higher income during volatile markets or periods of high interest rates, as call option premiums usually rise with volatility and rates.
• Can outperform during sideways-trading or falling markets, as income generated from selling calls can mitigate drawdowns. 
  
  

The Nasdaq 100 is a familiar index to many Australians. As the major benchmark of the US technology sector, it plays home to Microsoft, Amazon, Apple, Netflix and Tesla. Despite its strong performance over the past decade, many Australians have steered clear as the Nasdaq pays a lower dividend yield than other indexes. The lower yield owes to the fact that many US tech companies choose to pay no dividends and opt to reinvest cash or conduct share buybacks instead.

In this setting, covered call strategies provide something of a solution, and provide a way to invest in the Nasdaq 100 while also generating yield.

Before investing, investors should ensure they understand covered call option writing risk. By writing covered call options in return for the receipt of premiums, QYLD will give up the opportunity to benefit from potential increases in the value of the Nasdaq 100 above the exercise prices of such options but will continue to bear the risk of declines in the value of the Nasdaq 100.

The premiums received from the options may not be sufficient to offset any losses sustained from the volatility of the underlying stocks over time. As a result, the risks associated with writing covered call options may be similar to the risks associated with writing put options. In addition, QYLD’s ability to sell the securities underlying the options will be limited while the options are in effect unless QYLD cancels out the option positions through the purchase of offsetting identical options prior to the expiration of the written options. Exchanges may suspend the trading of options in volatile markets. If trading is suspended, QYLD may be unable to write options at times that may be desirable or advantageous to do so, which may increase the risk of tracking error.

• QYLD tracks the Cboe Nasdaq-100 BuyWrite V2 Index.
• The fund invests in the Nasdaq 100 Index on a fully replicated basis.
• It then sells a succession of one-month at-the-money – or nearest out-of-the-money – exchange traded call options on the same index worth roughly 100% of the value of the portfolio.
• Options are rolled to the next month the day before expiry. Expiring options are bought back at the volume weighted average price determined at the close.

There are many income solutions available to Australian investors, such as buying high yield bonds or dividend paying stocks. But covered calls are different in that their income is hedged against rising volatility and interest rates. All else being equal, when volatility rises, option premiums rise as options traders price higher probabilities of sharp share price movements into calls. When interest rates rise, call option premiums mechanically rise too, as call sellers provide, in effect, a loan to buyers. The economics of which gets priced into premiums1. Furthermore, options premiums tend to be inversely correlated to dividend yields—with lower dividend yielding stocks producing higher premiums – creating a natural hedge.

All investments come with risks – and covered calls are no exception. Chief among the risks is that in bull markets, when share prices rise sharply, option sellers get called away. This means that portfolios running covered call strategies do not fully participate in rallies and can under perform during bull markets. 

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The issuer of units in Global X Nasdaq 100 Covered Call ETF (AYLD) ARSN: 657 948 626 is the responsible entity of the Fund, being Global X Management (AUS) Limited (AFSL 466778) (“Global X”). The product disclosure statement (PDS) for the Fund contains all of the details of the offer of units in the Fund. Copies of the PDS are available from Global X Management (AUS) Limited or at www.globalxetfs.com.au. In respect of each retail product, Global X has prepared a target market determination (TMD) which describes the type of customers who the relevant retail product is likely to be appropriate for. The TMD specifies distribution conditions and restrictions that will help ensure the relevant product is likely to reach customers in the target market. Each TMD is available at www.globalxetfs.com.au. The information provided in this document is general in nature only and does not take into account your personal objectives, financial situations or needs. Before acting on any information in this document, you should consider the appropriateness of the information having regard to your objectives, financial situation or needs and consider seeking independent financial, legal, tax and other relevant advice having regard to your particular circumstances. Any investment decision should only be made after obtaining and considering the relevant PDS and TMD. Investments in any product issued by Global X are subject to investment risk, including possible delays in repayment and loss of income and principal invested. None of Global X, the group of companies which Mirae Asset Global Investments Co., Ltd is the parent, or their respective directors, employees or agents guarantees the performance of any products issued by Global X or the repayment of capital or any particular rate of return therefrom. The value or return of an investment will fluctuate and an investor may lose some or all of their investment. Past performance is not a reliable indicator of future performance. The Fund is not sponsored, endorsed, sold or promoted by Nasdaq, Inc. or its affiliates (Nasdaq, with its affiliates, are referred to as the “Corporations”). The Corporations have not passed on the legality or suitability of, or the accuracy or adequacy of descriptions and disclosures relating to, the Fund. The Corporations make no representation or warranty, express or implied to the owners of the Fund or any member of the public regarding the advisability of investing in securities generally or in the Fund particularly, or the ability of the Nasdaq 100 to track general stock market performance. The Corporations’ only relationship to Global X Management (AUS) Limited (“Licensee”) is in the licensing of the Nasdaq®, Nasdaq 100 and certain trade names of the Corporations and the use of the Nasdaq 100 which is determined, composed and calculated by Nasdaq without regard to Licensee or the Fund. Nasdaq has no obligation to take the needs of the Licensee or the owners of the Fund into consideration in determining, composing or calculating the Nasdaq 100. The Corporations are not responsible for and have not participated in the determination of the timing of, prices at, or quantities of the Fund to be issued or in the determination or calculation of the equation by which the Fund is to be converted into cash. The Corporations have no liability in connection with the administration, marketing or trading of the Fund. The Corporations do not guarantee the accuracy and/or uninterrupted calculation of the Nasdaq 100 or any data included therein. The Corporations make no warranty, express or implied, as to results to be obtained by Licensee, owners of the fund, or any other person or entity from the use of the Nasdaq 100 or any data included therein. The Corporations make no express or implied warranties, and expressly disclaim all warranties of merchantability or fitness for a particular purpose or use with respect to the Nasdaq 100® or any data included therein. Without limiting any of the foregoing, in no event shall the Corporations have any liability for any lost profits or special, incidental, punitive, indirect, or consequential damages, even if notified of the possibility of such damages.

Information current as at 25 January 2023