Covered Call ETFs Sidestep Market Volatility

The income from PBP is interesting because it often experiences big changes over time. Distributions are paid on a quarterly basis to shareholders and over the last 12-months the trailing yield is 5.40%. Some of those distributions have included short and long-term capital gains as well.

Another worthy contender in this space is the Recon Capital NASDAQ 100 Covered Call ETF (QYLD). This ETF implements a similar strategy based on the NASDAQ-100 Index. The end result is a more concentrated mix of stocks with concentrations in technology and consumer discretionary sectors.

This ETF has been able to achieve a similar pattern of reduced draw down relative to the PowerShares QQQ (QQQ) during periods of market stress.

qyld_qqq

 

QYLD charges an expense ratio of 0.60% and income is distributed on a monthly basis to shareholders. This may be a more attractive feature for income investors who are searching for a more regular dividend stream. The trailing 12-month distributions indicate a yield of 10.49% based on the current share price of QYLD.

The Bottom Line

These buy-write strategies have traditionally been a more obscure way to generate income while reducing draw down during sideways or falling markets. This likely means that they are going to be more of a tactical opportunity in the context of a diversified portfolio rather than a dedicated core position. Investors considering these funds should closely research the underlying mechanics of how the income is generated and compare against other potential low volatility alternatives as well.

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Disclosure: At the time this article was written, David Fabian and clients of FMD Capital Management owned shares of USMV.The views expressed by Aaron Jackson are ...

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