The ongoing debate about the debt ceiling has created an opportunity to invest in a closed-end fund (CEC), which offers a yield of 7%. This investment is always on our watch list and it is the Nuveen NASDAQ 100 Dynamic Overwrite Closed End Fund (NASDAQ: QQQX).
QQQX is like an index fund of the NASDAQ, however it offers higher dividends and a smart way for extra dividends with increased volatility. The fund’s holdings are similar to the Invesco QQQ Trust (NASDAQ:QQQ), which includes large-cap technology firms.
QQQX-Top Holdings
Source: Nuveen
QQQX tracks the NASDAQ 100 similar to QQQ, thus, the portfolio comprises strong technology companies. The fund sells call options on its portfolio as a form of insurance and to generate additional income. As QQQX owns $1.2 billion worth of stocks, it can sell options that generate around 2% to 3% of its asset value in the form of cash premiums paid to the fund by option buyers. This cash is then paid out to shareholders as dividends.
QQQX’s yield is more than 3%, including a 0.8% dividend yield from its holdings. The rest of its total return is generated through capital gains from its portfolio. The fund’s option strategy performs well when there is a rise in volatility. This situation is likely to arise with Congress debating the debt ceiling, potentially adding to investor worries.
In the past, the US Congress has flirted with defaulting on its debt, which has led to a negative impact on the stock market. However, currently, the stock market isn’t reacting to the Congress’s political wrangling about the debt ceiling as it realizes that it’s political. Therefore, the chances of a serious fall in the market are low, but there may still be volatility until Congress agrees to a deal.
Investing in QQQX could be the solution for investors to capitalize on increased volatility.
Disclosure: Brett Owens and Michael Foster are contrarian investors who look for undervalued stocks/funds across the US markets.
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