This term is one of the key terms that many people like and hoped to achieve. It simply means having income generated from non-active methods such as your 9 to 5 job. In my last article (How to earn passive income using options), I have covered the basic of using cash secured puts or covered calls as option strategies to generate “passive income”. Do take note of the inverted commas, I would like to reiterate that this is not as passive as one think and the risk level is slightly higher.
For those who still can’t understand options, one of the popular is to buy this counter QYLD.
What is QYLD?
QYLD is Global X NASDAQ 100 Covered Call ETF.
The Global X Nasdaq 100 Covered Call ETF (QYLD) follows a “covered call” or “buy-write” strategy, in which the Fund buys the stocks in the Nasdaq 100 Index and “writes” or “sells” corresponding call options on the same index (see QYLD).
In short, this counter will do the job for you by using covered calls to get “passive option” income for you. One just need to buy this counter and collect “monthly passive option income”.
What is Covered Call?
Covered calls are an option strategy that can be used to create a stream of income from the stock you already own, as well as potentially increase your overall profit.
The idea behind this strategy is simple: find stocks that are overvalued and sell call options against them. This allows us to earn premiums from selling call contracts while still retaining full ownership of the shares we hold.
Income from Covered Call
The covered call is based on buying an underlying stock and selling a call option against it at the same time. In other words, if you own 100 shares of Company X and sell one call contract at $10 (at-the-money), then if Company X’s share price rises above $10 per share before expiration date, then whoever owns this particular call option will exercise their right to purchase your 100 shares from you for $10 each–plus any dividends paid out by Company X between now and when their options expire (if any).
Why Covered Call?
Covered calls are an effective way to generate income and potentially increase your overall profit. They can be used as a strategy to:
- Earn a premium on the stock you already own.
- Take advantage of the market’s volatility to increase your profits at the same time that it may depress other investments in your portfolio.
- Protect against losses if the market declines, while still generating income from covered call trades.
While selling covered calls isn’t something I recommend for novice investors or those with limited risk appetite, it can be an effective strategy for seasoned traders looking for a steady stream of income without having to deal with any sort of margin requirements (which most brokers require).
For most other people, QYLD might seems to be a good solution since this is a way to let the professional fund manager to do this strategy for them.
There are 3 main reasons stated in the Global X website itself.
- High income from the covered call option
- Monthly Distributions as option income
- Save time and effort
Let’s look at some of the key characteristics of this fund
- Inception Date: 12/11/13
- Total Expense Ratio: 0.60%
- Net Asset: 6.81 Billions
- Number of Holdings: 102
- Distribution Yield: 13.03%
- Distribution Frequency: Monthly
- Top holdings: Look at the screenshot below, they are all great companies that many love to owned!
Wow, one look at the above, 13% yield with monthly distribution! This is the dream of many “passive income” investor! Where else can you get such good returns from one single counter alone? It’s a must buy without regrets!
Hold on a second… let’s dug further.
If we look further into the overall returns over the years (see photo below), the annualized return since inception is 5.64% p.a. Not too shabby! But how come it is lesser than the 13% yield mentioned above?
Let’s look at the share price. The share price is actually declining since inception. What does this mean?
Hence it simply means that after discounting the capital loss + dividend return, the actual return is only 5.64% p.a since inception. Hence you don’t really get 13% “passive monthly” income after all but still not that bad after all since there is a 5.64%?
Let’s dig further
I shared some key passive great dividend counters via my past article 4 Dividend ETFs that can let you sleep well even in the scary bear market. Do read again this article if you missed this post earlier. These counters are great for investors (especially for Singapore Investors that worry about withholding tax. London LSE ETF is only 15% tax).
Let’s go back to QYLD and compare the return of this counter with the famous world index fund – Vanguard Total World Stock ETF (VT). This is one of the famous US ETF by vanguard that track the performance of the FTSE Global All Cap Index, which covers both well-established and still-developing markets. This is equivalent to the VWRD ETF that I have shared in the article 4 Dividend ETFs that can let you sleep well even in the scary bear market.
If we look at the return of Vanguard Total World Stock ETF (VT), it gives 6.63% p.a. return since inception date of 6 Jun 2008 but give 8.52% p.a. 10 years return from today which mean (Feb 2012). 5 years return is 5.72% p.a.
If we compared to QYLD above, you get 5.62% p.a. since inception date of Nov 2013 and 3% p.a. return for 5 years return.
Given the figures above, judge for yourself if it is worth it to get QYLD for “monthly passive income from covered calls” or simply just buy world index fund like VT?
Alternatively, you can also compare QYLD with these 5 other shares that I have shared before to draw your own conclusion (5 Best Counters for Passive Dividend Investing).
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