Good Strategy, High Yield

Poor Execution

Every week, we’ll profile a high yield investment fund that typically offers an annualized distribution of 6-10% or more. With the S&P 500 yielding less than 2%, many investors find it difficult to achieve the portfolio income necessary to meet their needs and goals. This report is designed to help address those concerns.

The rotation from mega-cap tech into small-caps showed investors why risk management is still important. With many people overweighting their portfolios in the magnificent 7 stocks, some were ill-positioned and left behind when conditions finally turned. While we still need time to see if the past two weeks turns into a longer-term trend for the markets or if this was just a simple mechanical reversal, it’s clear that investors should be spending some time here thinking about risk management techniques. After all, there are a lot of signals suggesting that the U.S. economy is slowing even though the S&P 500 and Nasdaq 100 are still not that far from all-time highs.

The Global X Nasdaq 100 Risk Managed Income ETF (QRMI) is an intriguing option. It essentially copies the covered call strategy of the popular Global X Nasdaq 100 Covered Call ETF (QYLD), but adds on a protective put in order to shield investors from some downside risk. The result is a portfolio that still generates a double digit yield, but takes some extreme tail risk out of the equation. If you got spooked by the recent tech pullback and are worried that the worst may be yet to come, this might be an option worth looking into.

Fund Background

QRMI seeks to provide investment results that correspond generally to the performance of the Nasdaq 100 Monthly Net Credit Collar 95-100 Index. It employs a protective net-credit collar strategy for investors seeking the income characteristics of a covered call fund, while mitigating the risks of a major market selloff with a protective put. QRMI seeks to achieve this outcome by owning the stocks in the Nasdaq 100 Index, while buying 5% out-of-the-money put options on the index and selling at-the-money call options on the same index.

The strategy to write options on 100% of the fund’s holdings with at-the-money strike prices is designed to maximize income, but it also essentially forgoes the potential for any meaningful share price appreciation. QYLD has often generated a distribution yield of 10-12% in the past. QRMI could probably be expected to do the same for now minus the cost of the purchased put. Yields and option prices are entirely dependent on volatility, so this could change at any time, but Global X covered call strategies have traditionally been some of most straightforward and highest yielding products in this space.