Looking for some high yield income from the high-flying Nasdaq 100? There are many funds out there which seek to create income from the Nasdaq via selling covered call options.
The Roundhill N-100 0DTE Covered Call Strategy ETF (BATS:QDTE) is one of the newer ones – it started trading on 3/7/24.
Fund Profile:
Roundhill N-100 0DTE Covered Call Strategy ETF seeks to provide current income and capital appreciation. The fund seeks to achieve its investment objectives through the use of a covered call strategy that combines a long position in the Nasdaq-100 Index (“NDX”) with a short position in NDX call options. The fund’s short position consists of NDX call options having zero days to expiration, known as “0DTE” options when sold by the fund. The fund is non-diversified. (QDTE site)
QDTE has 1.2M shares outstanding, with average daily trading volume of ~77K. Its expense ratio is 0.95%:
Roundhill offers 16 ETFs, with various focuses, some of which have interesting names, such as WEED, which covers cannabis-related companies, and NERD, which tracks the Nasdaq CTA Global Video Games Software Index.
Dividends:
QDTE takes a novel approach to paying distributions – it pays them on a weekly basis. Here’s a list of its most recent payouts in June and July. The distributions vary, according to the option premiums QDTE receives.
The most recent weekly distribution was for $0.241214. The next weekly distribution amount will be declared on 7/31/24, with an 8/1/24 ex-dividend date, and an 8/2/24 pay date.
QDTE began trading on 3/7/24 at a price of $46.02. As of 7/23/24, it had lost $1.40/unit in price, which was mitigated by the $4.61/share in distributions it has paid out so far, for a total return from inception of 6.98%.
Initial investors have recouped 10% of their investment thus far. If QDTE were to maintain this pace of distributions, it would take investors a bit over three years to recoup their initial investment of $46.02.
However, as these are variable distributions, there’s no way to exactly estimate how long it would take investors to recoup their entire investment.
The Nasdaq 100 has a total return of 10.56%, based on price, during this period. QDTE has outperformed the popular Global X Nasdaq 100 Covered Call ETF’s (QYLD) 4.73% return, but has lagged the Nasdaq 100 and the Nuveen Nasdaq 100 Dynamic Overwrite Fund’s (QQQX) 8.41% return.
Management announces each weekly distribution the day before it goes ex-dividend, and two days before its pay date. They’ve already posted the weekly dates for the rest of 2024. Here’s a look at the dates for the rest of July and August:
Taxes:
So far, it appears that these weekly distributions are estimated to come from return of capital, ROC, although the site’s 19a notices state that, “The final determination of the tax character of distributions paid by the Funds in 2024 will be reported to shareholders in January 2025 on Form 1099-DIV.”
ROC offers tax deferral, but it does reduce your tax basis, which will impact your taxable profit if you sell.
Risks:
The fund lists risks in pages 4-10 of its summary prospectus.
Among them is the risk that, “The premiums received from the options may not be sufficient to offset any losses sustained from Innovation-100 Index price declines.”
“The Fund’s use of zero days to expiration, known as “0DTE” options, presents additional risks. Due to the short time until their expiration, 0DTE options are more sensitive to sudden price movements and market volatility than options with more time until expiration.”
Also listed are liquidity risk, concentration risk, asset class risk, market risk, and several other risks.
Holdings:
Rather than owning an index security outright, the QDTE fund holds a long call position on the NDX index, utilizing a “synthetic covered call strategy.”
“The Fund’s synthetic exposure to the return of the Innovation-100 Index is achieved through purchasing call options that are deeply in-the-money. This refers to the fact that at the time the Fund purchases such call options, the value of the Innovation-100 Index is already well above the strike price of the options contract.” (QDTE prospectus)
At market open, or shortly thereafter, on every business day, the fund generally sells out-of-the-money 0DTE call options on the Innovation-100 Index that will expire at the end of the day.
While the call options that QDTE sells provide income via option premiums, the upside is capped by the strike price of the sold options. Also, if the Innovation-100 Index appreciates in value beyond the strike price of the call option contracts that the fund has sold to generate income, the fund will lose money on those short call positions.
The fund also holds ~$9.14M in the First American Gov’t Obligations Fund, dated 12/1/2031:
Parting Thoughts:
Since its 3/7/24 inception, QDTE has offered a better return than QYLD, but lags QQQX, and the NASDAQ 100 index. We don’t have a lot of data to go on as of yet. We’re going to hold off buying any QDTE until it has a longer track record.
All tables furnished by Hidden Dividend Stocks Plus, unless otherwise note
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