A Fresh Approach to Minimizing the Nasdaq-100

Home to the likes of Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN), and an assortment of other well-known growth stocks, the Nasdaq-100 Index (NDX) is a paradise for investors seeking growth exposure. Importantly, the Nasdaq-100 has a lengthy history of outperforming rival broader benchmarks, such as the S&P 500 and the Russell 1000.

Source: A Fresh Approach to Minimizing the Nasdaq-100

However, that out-performance isn’t a free lunch, and NDX is historically low-yielding.

A new exchange traded fund could ameliorate those scenarios. The Global X Nasdaq 100 Collar 95-110 ETF (QCLR), which tracks the Nasdaq-100 Quarterly Collar 95-110 Index, debuted last week. QCLR offers a unique approach to NDX by owning the stocks in that venerable index, providing protection by allocating to 5% out-of-the-money (OTM) put options, and generating some income by selling 10% out-of-the-money call options on the same index. That’s an options strategy known as a collar.

“A collar bounds performance between a specific range through the options’ expiration date. Downside is limited to the extent of the put option’s strike price, while gains are limited to the call option’s strike price. Depending on the collar design, the options contracts can be a net debit (meaning they cost money to implement), net credit (meaning they generate positive income), or zero cost,” according to Global X research.

For income seekers, QCLR’s call writing component is potentially compelling because NDX yields just 0.48%. For investors seeking some downside protection, QCLR could be attractive because the Nasdaq-100 occasionally has bouts with volatility.

“Not all investors want to experience such great volatility, particularly on the downside. Instead, they’d prefer to set expectations ahead of time for the range of possible outcomes,” adds Global X. “Collar strategies can help achieve this. Perhaps most importantly, they can mitigate downside risks through the purchase of a protective put. But by selling a covered call, the strategy can also help limit the cost of the put in exchange for limiting upside potential.”

While QCLR is a rookie ETF, it has a potentially wide audience. Investors looking to manage downside risk and those fearful of large drawdowns may find the new Global X ETF attractive. Additionally, investors tired of low bond yields and the relative lack of excitement in the fixed income universe could find QCLR to be an attractive alternative.

“Last, investors who are already implementing options strategies in their portfolio, but would prefer to outsource the management to other portfolio managers, may appreciate the efficiency of the ETF structure,” concludes Global X.

For more news, information, and strategy, visit the Nasdaq Investment Intelligence Channel.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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