ProShares has launched its second alternative income ETF powered by a daily covered call strategy with the latest fund based on the Nasdaq 100.
IQQQ is the first ETF to deliver a daily covered call strategy on the Nasdaq 100.
The ProShares Nasdaq 100 High Income ETF (IQQQ US) has been listed on Nasdaq with an expense ratio of 0.55%.
A covered call is an options strategy whereby an investor holds a long position in an asset and sells or “writes” call options on that same asset in an attempt to generate more income (the additional income from option premium) than the asset would otherwise provide on its own from dividends or other distributions.
Historically, during bear markets, range-bound markets, and modest bull markets, covered call strategies have generally outperformed their underlying securities. However, during strong bull markets, when the underlying securities may frequently rise through their strike prices, covered call strategies historically have tended to lag.
Regarding IQQQ, the fund tracks the Nasdaq 100 Daily Covered Call Index, combining a long position in the Nasdaq 100 with a short position in standardized Nasdaq 100 call options representing a target notional value of 100% of the portfolio’s assets. The fund invests directly in Nasdaq 100 stocks while utilizing swap agreements for the short call option exposure.
Notably, the index utilizes a daily covered call strategy by selling call options with one day to expiration each day. The options are written out-of-the-money with the strike prices determined by a function of the Nasdaq 100’s current level and implied volatility.
IQQQ differs from traditional covered call ETFs which sell monthly call options each month. According to ProShares, by utilizing daily options, IQQQ exhibits lower timing risk compared to its monthly options-based counterparts, thereby striking a more favourable balance between the pursuit of income and the potential for long-term equity returns.
Michael L. Sapir, CEO of ProShares, commented: “Many investors seeking income have added covered call ETFs to their portfolios. However, conventional covered call ETFs often sacrifice total return to generate high income. IQQQ, the first Nasdaq 100 ETF powered by a daily call options strategy, offers investors both the potential for high income and a long-term total return approximating that of the Nasdaq 100.”
IQQQ is the second ProShares ETF to deliver a daily covered call options strategy following the December 2023 launch of the ProShares S&P 500 High Income ETF (ISPY US) which is based on the S&P 500. That fund also comes with an expense ratio of 0.55%.