WASHINGTON, DC – MAY 17: US Speaker of the House Kevin McCarthy (R-CA) speaks to reporters , [+]
There’s a lot of rhetoric going on these days about debt ceiling, and this is a great opportunity for us to buy 7%-yielding closed-end funds (CEFs). Always Our watch is on the list.
he will be Nuveen Nasdaq 100 Dynamic Overwrite Fund (QQQX).
A good way to think of QQQX is like a NASDAQ index fund, but with higher dividends and additional dividends as a smart way to turn volatility into cash. I say QQQX is like a NASDAQ index fund because its holdings mirror those of Invesco QQQ Trust (QQQ), Including all the large-cap technologies we know all too well:
QQQX Top Holdings
The QQQX, like the QQQ, tracks the NASDAQ 100, so it’s no surprise you’ll see great tech firms in its portfolio. In addition, QQQX does something special: It sells call options on its portfolio, both as insurance and as a way to generate additional income.
Since QQQX holds $1.2 billion worth of stocks, it can sell options on its portfolio which can generate approximately 2% to 3% of its asset value in the form of cash premiums paid to the fund by option buyers. QQQX then hands out that cash to shareholders in the form of dividends.
Of course, the QQQX has a yield of over 3%. More than double, in fact, since the fund also receives a dividend yield of about 0.8% from its holdings. It supplements its total return (including the rest of its dividends) with capital gains from its portfolio.
The fund’s options strategy does well when volatility ticks up — and volatility could be poised to do so in the coming weeks, with investor concern rising over debt.
credit limit fear
The last time the US Congress toyed with defaults on the debt was in 2011, and the stock market No Happy.
2011 debt ceiling drama
In 2011, despite a good start to the year and a recovery already underway in both the economy and the stock market after the Great Recession, stocks did not rise. Congress stalled that momentum, and it’s easy to see from the chart when it happened—though Congress ultimately struck a last-minute deal.
Fast forward to this year and we have yet to see a similar phenomenon in the markets. This is because this time the market has realized that the political tussle of the Congress on debt ceiling is only political. Last-minute deals, worrisome warnings of default and excessive rhetoric from both sides are part of the game around the debt ceiling.
In 2011, markets were fragile following the subprime mortgage crisis, and movements such as Occupy Wall Street added to the insecurity. These days, the markets are more attuned to the fact that Congress likes to stoke the fear surrounding the debt ceiling. So I don’t see the market going down significantly from here. But even then, there is the potential for more volatility between now and when a deal is essentially signed.
It’s ours with QQQX, which effectively turns that volatility into cash, while giving us exposure to long-term gains in some of the strongest tech stocks.
Michael Foster is Lead Research Analyst opposite point of view, For more revenue ideas, click here for our latest report”Perpetual Income: 5 bargain funds with steady 10.4% dividend.,
Disclosure: none
