QQQX: Strong Tech Fund For Retirees – 6.11% Yield (NASDAQ:QQQX)


The Nuveen Nasdaq 100 Dynamic Overwrite Fund (QQQX) is a CEF which invests in the tech-heavy Nasdaq-100 index (QQQ), and sells covered calls on about half of its holdings. QQQX basically trades half the upside of QQQ for an increased 6.11% dividend yield, and might make sense for retirees or income investors who are somewhat bullish about tech, but who still wish to invest in high dividend yield funds.

The fund’s strong 6.11% dividend yield, possibility of moderate capital appreciation and history of market-beating performance make for a strong investment opportunity for investors, although the fund, as well as QQQ more broadly, is looking a bit pricey.

As a final point, there are several option funds focusing on QQQ that use diverse income-boosting strategies. I thought to include a small chart with some details of the different funds, so that interested readers can more easily select the fund with the characteristics they desire.

(Source: Chart by author)

Fund Basics

  • Sponsor: Nuveen
  • Underlying Index: Nasdaq-100
  • Dividend Yield: 6.11%
  • Expense Ratio: 0.91%
  • Total Returns CAGR (Inception): 10.84%

Fund Overview

QQQX is a CEF which invests in a portfolio that aims to track the performance of the tech-heavy Nasdaq-100 index, as well as selling call options on just above half of its holdings. These options boost the income and yield of the portfolio and fund, should somewhat lower portfolio risk and volatility, but lower shareholder returns during bull markets.

Let’s start by looking at the fund’s underlying index.

The Nasdaq-100 index is a stock market index, which includes the 100 largest domestic and international non-financial companies listed on the Nasdaq Stock Market. Index weights are based on market capitalization, with some assorted rules to ensure that the index is highly concentrated in a few names. Due to these rules, the exclusion of financial companies, and the emphasis on a comparatively small number of companies, the fund is very concentrated in a few names, with the top five holdings comprising more than 50% of the index and fund:

(Source: QQQX Corporate Website)

QQQX is also very tech-focused, with the tech industry, broadly defined, accounting for more than 80% of the fund’s holdings:

(Source: QQQX Factsheet)

The Nasdaq-100 has been one of the best-performing equity indexes for the past decade, due to skyrocketing tech industry revenues, earnings, and valuations. Companies like Amazon (AMZN), Facebook (FB) and Apple (NASDAQ:AAPL) have outperformed, and so has the index:

ChartData by YCharts

QQQX invests in the same securities as QQQ, but then sells covered call options on a bit over half of its holdings. As mentioned previously, these options boost the fund’s dividends but somewhat cap its upside potential.

It is also important to emphasise the fact that QQQX only sells call options on about 57% of the fund’s holdings or NAV, with the remainder basically consisting of Nasdaq-100 (QQQ) stocks. This means that QQQX has about half the upside of QQQ, more when considering the fund’s option premiums, and should closely track said index. This has indeed been the case in the past:

ChartData by YCharts

You can think of QQQX as trading about half the upside of QQQ for an extra 5.5% dividend yield (6.1% versus 0.6%), a good deal for retirees or income investors who are somewhat bullish on tech, but not very bearish either. Said trade is almost certainly unprofitable if QQQ’s performance remains outstanding, think mid-double-digit annual returns, but somewhat more profitable if returns are more subdued, think low single-digits.

You can also think of QQQX as a cross between QQQ itself and the Global X NASDAQ 100 Covered Call ETF (QYLD), previously covered here, which invests in the same index, but sells covered calls on 100% of its holdings.

Finally, a quick table summarizing the fund’s options, for those who want more detailed information of the same:

(Source: QQQX Corporate Website)

Performance Analysis

QQQX performs broadly in line with expectations. The fund underperforms the Nasdaq-100 index during bull markets and in the very long term, due to its covered call options strategy. QQQX has also moderately outperformed the S&P 500 during bull markets and in the very long term, while suffering fewer losses during downturns, due to its tech-heavy focus. Results are as follows:

(Source: AlphaVantage – chart by author)

QQQX is, surprisingly, not that much safer or less volatile than QQQ, although the situation seems somewhat complicated. QQQX sometimes seems to outperform or underperform relative to QQQ for unclear reasons, but probably a combination of tracking error and changes in options pricing. For example, the fund performed quite badly during 2018, even though the Nasdaq-100 was flat:

ChartData by YCharts

These swings seem to increase the volatility of the fund, with QQQX actually being a higher-risk choice compared to equity indexes:

(Source: AlphaVantage – chart by author)

On the other hand, QQQX performed reasonably well during the past financial crisis, so perhaps its options strategy does reduce risks somewhat:

ChartData by YCharts

I also wanted to compare QQQX to some other covered call CEFs. I selected the following two funds, all portfolio holdings of either the Tactical Income-100 or Income Generator Portfolio:

  • BlackRock Enhanced Capital & Income Fund (CII)
  • BlackRock Enhanced Equity Dividend Trust (BDJ)

Results are as follows:

(Source: AlphaVantage – chart by author)

As can be seen above, QQQX consistently outperforms its CEF peers, and has performed exceedingly well during the ongoing coronavirus outbreak, posting some very strong gains during this.

Results are almost exclusively due to QQQX’s tech focus, which has performed quite well during this past decade. So, for example, QQQX’s TTM returns are about 4.9% higher than those of CII and BDJ, while the Nasdaq-100 index has outperformed the S&P 500 by 5.7% for the same time period. QQQX might continue to outperform its CEF peers if the tech industry likewise continues to do so, but this is not necessarily going to keep happening.

As a final point, QQQX is currently trading at NAV, while its peers are trading with sizable discounts. Although QQQX is a strong fund, it is not a cheap one. Investors could consider waiting until more opportune times to enter into a position, or at least wait until the fund’s relative discount narrows.

ChartData by YCharts

Nasdaq-100 Call Option Funds Comparison

Finally, I wanted to include a quick table with performance information for QQQ and some options funds focusing on said index. Results are as follows:

(Source: AlphaVantage – Chart by author)

As can be seen above, QQQX has underperformed relative to NUSI, but outperformed relative to QYLD. This is due to the fact that QQQX’s options strategy reduces the fund’s upside, but maintains its downside, which is particularly harmful during swift market corrections. QYLD sells covered calls on the entirety of the fund’s holdings, so it performed even worse. NUSI’s options strategy reduces the fund’s upside and downside, see how the fund’s performance during any particular month is generally smaller than that of QQQ, a strategy that performed much better during the downturn.

The different funds have different benefits and drawbacks, but QQQX has definitely not performed all that well during these past few months.

Conclusion

QQQX’s strong 6.11% dividend yield, market-beating performance, and defensive options strategy make for a strong fund and investment opportunity, and is a particularly strong choice for investors looking for tech funds.

As a final point, I plan to publish an article on NUSI, a somewhat similar, lower-risk lower-reward fund, in the coming days.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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