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This week, Wall Street has seen a crash in tech stocks thanks mainly to Alphabet Inc.'s (GOOGL - Free Report) earnings report, which highlighted increased capital expenses. Tesla Inc.’s (TSLA - Free Report) stock also suffered following its earnings results due to a lack of details from CEO Elon Musk on the company's self-driving vehicle efforts.
This triggered a rout in the tech-heavy Nasdaq-100, which wiped out about $1 trillion in market capitalization from the tech-heavy index. Most artificial intelligence (AI) technology leaders, including semiconductor giants like NVIDIA Corp. (NVDA - Free Report) , Broadcom Inc. (AVGO - Free Report) , Super Micro Computer Inc. (SMCI - Free Report) and Arm Holdings Plc (ARM - Free Report) took a beating.
Many feared that the huge AI investments made by big tech companies would pay off later than expected. The scale of profitability of those investments is also unknown now, while the high valuation of the AI stocks is a concern for many investors. The Bloomberg index of the so-called Magnificent Seven technology stocks went down 5.9% on Jul 24, falling below its average price for the past 50 days for the first time since May.
Should You Totally Avoid Tech Stocks?
Probably no. Many market experts believe that technology exposure should be there in every portfolio but with downside protection. And covered call strategy offers that benefit. While the underlying momentum of the tech stocks is still in place due to continued innovations and offerings in the AI space, one shouldn’t rule out the tech exposure totally. But occasional selloffs are likely.
A covered call strategy saves one from such selloffs to a large extent. The strategy involves holding a long position in a stock and selling call options on the same stock to generate additional income. During the time of a selloff, while the primary stock position loses value as the stock price drops, the premium from the call options partially cushions it from the ill impacts.
In this strategy, there are two benefits – 1) income generation, which implies premiums from selling options. 2) Downside Protection, where the premiums provide a small protection from potential losses in the stock.
Against this backdrop, below we highlight a few covered-call ETFs that could be proper investments at the current level.
The underlying CBOE NASDAQ-100 BuyWrite V2 Index measures the total return of a portfolio consisting of common stocks of the 100 companies included on the NASDAQ-100 Index and call options systematically written on those securities through a buy-write or covered call strategy. The fund charges 61 bps in fees and yields 10.90% annually.
The underlying Cboe S&P 500 BuyWrite Index seeks to track the performance of a hypothetical buy-write strategy on the S&P 500 Index. The fund charges 60 bps in fees and yields 9.51% annually.
This ETF is active and does not track a benchmark. The fund is the first ETF to utilize zero days to expiry (“0DTE”) options on an innovation index (the "Innovation-100 Index" as defined in the Fund Prospectus). QDTE seeks to provide overnight exposure to the Innovation-100 Index and generate income each morning by selling out-of-the-money 0DTE calls on the Index. The fund charges 95 bps and yields 10.74% annually.
The JPMorgan Equity Premium Income ETF seeks current income while maintaining prospects for capital appreciation. The ETF’s equity portfolio employs a time-tested, bottom-up fundamental research process with stock selection based on our proprietary risk-adjusted stock rankings. Disciplined options overlay implements written out-of-the-money S&P 500 Index call options that seek to generate distributable monthly income. The fund charges 35 bps in fees and yields 7.33% annually.
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Time for Covered Call ETFs?
This week, Wall Street has seen a crash in tech stocks thanks mainly to Alphabet Inc.'s (GOOGL - Free Report) earnings report, which highlighted increased capital expenses. Tesla Inc.’s (TSLA - Free Report) stock also suffered following its earnings results due to a lack of details from CEO Elon Musk on the company's self-driving vehicle efforts.
This triggered a rout in the tech-heavy Nasdaq-100, which wiped out about $1 trillion in market capitalization from the tech-heavy index. Most artificial intelligence (AI) technology leaders, including semiconductor giants like NVIDIA Corp. (NVDA - Free Report) , Broadcom Inc. (AVGO - Free Report) , Super Micro Computer Inc. (SMCI - Free Report) and Arm Holdings Plc (ARM - Free Report) took a beating.
Many feared that the huge AI investments made by big tech companies would pay off later than expected. The scale of profitability of those investments is also unknown now, while the high valuation of the AI stocks is a concern for many investors. The Bloomberg index of the so-called Magnificent Seven technology stocks went down 5.9% on Jul 24, falling below its average price for the past 50 days for the first time since May.
Should You Totally Avoid Tech Stocks?
Probably no. Many market experts believe that technology exposure should be there in every portfolio but with downside protection. And covered call strategy offers that benefit. While the underlying momentum of the tech stocks is still in place due to continued innovations and offerings in the AI space, one shouldn’t rule out the tech exposure totally. But occasional selloffs are likely.
A covered call strategy saves one from such selloffs to a large extent. The strategy involves holding a long position in a stock and selling call options on the same stock to generate additional income. During the time of a selloff, while the primary stock position loses value as the stock price drops, the premium from the call options partially cushions it from the ill impacts.
In this strategy, there are two benefits – 1) income generation, which implies premiums from selling options. 2) Downside Protection, where the premiums provide a small protection from potential losses in the stock.
Against this backdrop, below we highlight a few covered-call ETFs that could be proper investments at the current level.
ETFs in Focus
Global X Nasdaq 100 Covered Call ETF (QYLD - Free Report)
The underlying CBOE NASDAQ-100 BuyWrite V2 Index measures the total return of a portfolio consisting of common stocks of the 100 companies included on the NASDAQ-100 Index and call options systematically written on those securities through a buy-write or covered call strategy. The fund charges 61 bps in fees and yields 10.90% annually.
S&P 500 Covered Call ETF (XYLD - Free Report)
The underlying Cboe S&P 500 BuyWrite Index seeks to track the performance of a hypothetical buy-write strategy on the S&P 500 Index. The fund charges 60 bps in fees and yields 9.51% annually.
Roundhill N-100 0DTE Covered Call Strategy ETF (QDTE - Free Report)
This ETF is active and does not track a benchmark. The fund is the first ETF to utilize zero days to expiry (“0DTE”) options on an innovation index (the "Innovation-100 Index" as defined in the Fund Prospectus). QDTE seeks to provide overnight exposure to the Innovation-100 Index and generate income each morning by selling out-of-the-money 0DTE calls on the Index. The fund charges 95 bps and yields 10.74% annually.
JPMorgan Equity Premium Income ETF (JEPI - Free Report)
The JPMorgan Equity Premium Income ETF seeks current income while maintaining prospects for capital appreciation. The ETF’s equity portfolio employs a time-tested, bottom-up fundamental research process with stock selection based on our proprietary risk-adjusted stock rankings. Disciplined options overlay implements written out-of-the-money S&P 500 Index call options that seek to generate distributable monthly income. The fund charges 35 bps in fees and yields 7.33% annually.