by Bryan Perry
July 18, 2023
Some want income. Some want growth. How about some of both? The old saying of “having your cake and eating it too” comes to mind when certain stock market assets are not just “in the sweet spot” of what’s working best, but also are structured to deliver phenomenal income streams to investors seeking outsized yields – and I am not talking about junk bonds, or highly-leveraged securities, either.
Year-to-date, the stock market has been dominated by the so-called “Magnificent Seven” stocks that include the old “FAANG” names – with the added footnote that Nvidia Inc. (NVDA) has replaced Netflix (NFLX) as the “N” stock, while Microsoft (MSFT) and Tesla (TSLA) have joined Amazon, Apple, Alphabet (formerly Google), and Facebook (Meta). These companies have a combined market value in excess of $11 trillion, with each of them surpassing the performance of the S&P 500 for the year. We’ve seen a massive and concentrated move higher for the Mag-7, driven by the euphoria over all things “AI.”
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
To address this narrow and top-heavy phenomenon, it was announced recently that there will be a Nasdaq 100 special rebalancing taking place before the market opens on Monday, July 24, to “address over-concentration in the index by redistributing the weights.” The Nasdaq has only conducted a special rebalance twice in its history: in December 1998 and May 2011. Prior to the rebalance, the top five companies had a weighting of 46.7%, whereas after the rebalance, the weighting will be reduced to 38.5%. This is a meaningful change, but it will likely only slow the pace of the Mag-7’s advance.
This is happening on the cusp of second-quarter earnings season, with so much price appreciation built into the Nasdaq 100 holdings, so it begs the question of how much these companies need to beat estimates and raise guidance to add to their already-heady 2023 gains. Will this development spark a quantum “sell the news” phase of the rally, as recession fears are pushed out? If one looks at how risk is traded in the futures market (below), we can see some near-term caution heading into the current reporting period.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
For investors who wonder if the torrid advance for these stocks can continue, the next 2-3 weeks will help define an answer to that question – after the numbers and forward guidance are released. As to those in the market with income as their main objective (and yet still want to be in these behemoth tech darlings), there is some good news of how to have cake (capital gains from mighty Nasdaq) and eat it, too (income).
There are a handful of ETFs that own these top names and deploy an active covered-call strategy, where the annual yields are in excess of 10% and the ETFs make monthly payments. It has been about the best source of income generation available during a time when the Fed has been raising rates with bonds and other fixed income assets losing value over the course of the past 18 months as the Fed was hiking rates.
One such ETF is the Global X NASDAQ 100 Covered-Call ETF (QYLD), a fund that owns all the leading names within the top 10 holdings while selling calls on the Invesco QQQ Trust (QQQ) shares. The current distribution yield is a mouth-watering 11.56%. With monthly distributions included, QYLD has returned about 20.6% year-to-date.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
A second ETF of similar make up, but with a better track record is the JPMorgan Nasdaq Equity Premium Income ETF (JEPI). The fund owns many of the same stocks, but also has equity-linked notes within its portfolio and sells one-month out-of-the-money calls on its individual holdings. The current distribution yield is 10.75% and its monthly payout varies. Although the current yield is a tad lower than QYLD, the fund has put up a better total return of about 26% year-to-date including distributions.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
(Bryan Perry does not own any of these top 10 holdings, although he does trade options from time to time.)
Not knowing if the market has seen its best gains for 2023, and with the Fed still making some noises about further tightening, income investors have a clear choice of how to be in the way of further potential market gains while deriving an income stream that, in my view, has all the right ingredients to beat inflation, most dividend paying stocks, and just about everything in the bond and bond equivalent markets.
As with most of the big Nasdaq leaders, shares of JEPQ are a bit overbought, per the chart below, showing where the shares trade relative to their 20-day moving average (blue line).
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
What’s also nice about these covered-call funds is that they not only take advantage of market volatility by selling in the form of option income received, these strategies also lower share price volatility as well, as option income tends to cushion price fluctuations. Granted, the performance of both QYLD and JEPQ have not put up the same heady returns of the underlying stocks themselves, but they serve a different audience, where cash flow is the number one objective. For many income investors, that’s plenty good.
Navellier & Associates owns Nvidia Corp (NVDA), Apple Computer (AAPL), Microsoft (MSFT), Amazon (AMZN), and a few accounts own Meta Platforms (META), and Tesla (TSLA), per client request in managed accounts. We do not own Alphabet Inc. (GOOG), JP Morgan (JPM), or Netflix Inc (NFLX). Bryan Perry owns Apple Computer (AAPL), Amazon (AMZN) and Microsoft (MSFT) in a personal account. He does not own Netflix Inc (NFLX), Nvidia Corp (NVDA), Tesla (TSLA), Meta Platforms, (META), Alphabet Inc. (GOOG), JP Morgan (JPM), personally.
All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
Inflation is Rapidly Cooling – As Predicted – But is the Fed Listening?
Income Mail by Bryan Perry
Potential Double-Digit Income from “The Magnificent Seven” Stocks
Growth Mail by Gary Alexander
Pessimism is Popular, but Optimism is More Profitable
Global Mail by Ivan Martchev
The Stock Market is Acting Tired
Sector Spotlight by Jason Bodner
Patterns in Markets – Both False and Real
View Full Archive
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Bryan Perry
SENIOR DIRECTOR
Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.
Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry
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