Nasdaq Had Its Best First Half Since 1983. What’s Next?

Exchange-traded funds offer ways to have that cake and eat it too.

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Reviewed by: Lisa Barr
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Edited by: Ron Day

While we were moving our money into bonds this year on fears a recession was coming, the Nasdaq Composite index gained 33%, its best first half in 40 years.

This is a good news/bad news situation for investors considering their next move regarding Nasdaq exposure. On one hand, this year’s narrowly focused market is breaking long-standing records. Yet the index remains 14% below its all-time high from late 2021, and overall is little changed over the past two and a half years.

So, is the Nasdaq just catching up in what is becoming a volatile, range-bound era, or is this the big comeback?

Let’s examine ways exchange-traded fund investors can use the Nasdaq as a baseline to get the risk/return trade-off they prefer going forward.

'Nasdaq’ Your ETF Portfolio?

The Direxion NASDAQ-100 Equal Weighted Index Shares (QQQE) allows investors to partake in the Nasdaq-100. Its equally weighted holdings structure cuts the risk of the largest positions that now dominate the index. The Nasdaq-100 is essentially the same as the Nasdaq Composite, due to the relatively large size of the top 100 versus the thousands of other Nasdaq members.

Launched in 2012, with nearly $790 million in assets, QQQE has gained half of the Nasdaq-100’s 40% year-to-date jump, reflecting the fact that midsize and smaller companies haven’t kept up with the tech giants so far this year.

Then, there’s a pair of “hedged” ETFs that trade off some of the Nasdaq’s upside in exchange for different levels of downside protection. The larger of the two, at $8.1 billion in assets, the Global X NASDAQ 100 Covered Call ETF (QYLD), writes one-month covered call options on the Nasdaq-100, which has allowed it to produce a distribution yield of 11.8% over the past 12 months. However, that yield makes up virtually all of QYLD’s returns, since an investor trades off upside to accumulate and receive the options premium.

The Nationwide Nasdaq-100 Risk-Managed Income ETF (NUSI), its $453.1 million in assets magnitudes smaller than QYLD’s, takes the Nasdaq-100 and then writes covered calls against it as well. However, NUSI has a feature that makes it a peer, but quite a different ETF from QYLD.

NUSI also buys out-of-the-money put options, which combine with the call options to create an option “collar.” Thus, it has some upside, clamps down on downside, and distributes the difference between what it receives selling the calls, and what it pays to buy the put protection. Over the past 12 months, that has produced a yield of 7.25%, but a total return of 16%, clearly showing the trade-off between these two funds.

The Nasdaq is back. After losing one-third of its value during 2022, it is off to its best start in 40 years. That compels investors to determine how they want to “Nasdaq” their portfolios in the months and years ahead, choosing from a wide range of choices in their ETF toolbox.

Rob Isbitts was an investment advisor for 27 years before selling his practice to focus on ETF research and education. He is based in Weston, Florida. Contact him at  [email protected] and follow him on LinkedIn.