Global X NASDAQ-100 Covered Call ETF

QYLD

Market cap $8.43B

If you bought Global X NASDAQ 100 Covered Call ETF (NASDAQ:QYLD) a decade ago for the headline yield, the monthly checks have arrived on schedule.

The Global X NASDAQ 100 Covered Call ETF (NASDAQ:QYLD) advertises a trailing distribution yield around 12%, which is roughly ten times what the broad market pays.

At a 3.5% blended yield, replacing $75,000 requires roughly $2,142,857 in invested capital.

High monthly dividend yields are very attractive to investors who live off of passive income from dividend investments. However, not all of these investments are created equal, especially in the covered call arena. I compare GPIQ and QYLD to demonstrate this point.

According to the Internal Revenue Service (IRS), passive income generally includes earnings from rental activity or any trade, business, or investment in which the individual does not materially participate.

A covered call ETF holds a basket of dividend-paying stocks while simultaneously selling call options on those same holdings. In return, you get paid a premium. That premium is extra income on top of your regular dividends. Covered call funds work best when stock prices are stable or rising slowly. If the stock price shoots up dramatically, your shares might get called away at the strike price. You miss out on that extra gain. That's the one caveat to covered call ETFs - you cap your upside.

Not all that glitter is gold, and it is a good time to sell the glitter and buy something better instead.

I advocate for value-oriented covered call ETFs with underlying holdings beyond AI-saturated large-cap growth indices like SPY and QQQ. The risks for NAV erosion and income declines are higher on this front. Despite these risks, including some QQQ/SPY-linked covered call ETFs could enhance diversification and capture higher yields from volatility and growth.

Covered call ETFs offer attractive monthly yields, often exceeding 10%, appealing to income-focused investors. Most top covered call ETFs are heavily concentrated in large-cap growth, specifically S&P 500 and Nasdaq-100 exposures. This concentration introduces significant risk, as these ETFs exhibit strong performance correlations and similar downside profiles.

It shouldn't come as much of a surprise to hear that high yield has a bad reputation, and in plenty of cases, it deserves it.