The Nasdaq-100 Index (NDX) is known for a lot of things — lengthy outperformance of the S&P 500 among them — but income isn’t part of that list.
Just look at the Invesco QQQ Trust (QQQ ) and the Invesco NASDAQ 100 ETF (QQQM ), both of which follow the NDX. The trailing 12-month distribution rate on those exchange traded funds is just 0.60%. Fortunately, there are avenues for extracting higher levels of income from NDX. One of those avenues is the Invesco QQQ Income Advantage ETF (QQA ).
The actively managed QQA debuted last July as the NDX income component in Invesco’s broader suite of Nasdaq-100-linked ETFs. The rookie ETF making good on the promise of income (its 30-day SEC yield is 12.34%). But it could also be an appropriate consideration in the current market environment.
Why QQA Matters Today
One of the biggest knocks on covered call ETFs, including QQA, is that they limit investors’ upside participation in strong trending bull markets. That makes sense because call options are bullish contracts. When market participants write or sell those derivatives, they’re making a bet the underlying security will trade flat or decline over the contract’s lifespan.
That doesn’t imply ETFs such as QQA lack benefits. These funds have perks to offer investors, as highlighted by QQA’s eye-catching yield. Additionally, these ETFs can offer some downside protection when markets falter, as is happening to start 2025.
“Covered calls are an excellent form of insurance against potential trouble in the markets. When an investor with a long position in a particular asset sells a call option for that asset, generating a profit in the process, it is considered a covered call,” according to Investopedia.
Getting back to the income component of the QQA equation, options premiums are rooted in the underlying security’s volatility. Said another way, when broader markets become turbulent, index options premiums — such as those pertaining to NDX or the S&P 500 — increase in price. That means when volatility is running high, QQA can generate more income for investors. That’s because it’s selling calls at higher prices. Speaking of volatility, data confirms covered call strategies can reduce volatility. That potentially adds to the allure of ETFs like QQA.
“Partly due to the increase in returns when market volatility is high, a covered call approach is usually considerably less volatile than the market itself. Over a long time frame, the strategy of buying the S&P 500 and writing at-the-money calls had between 30% to 40% less volatility than the S&P 500 itself,” according to Investopedia.
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