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Why I added these two high yield ETFs to my income portfolio

Kevin Hamilton

Last week I added two prominent names to my income portfolio. For those of you that don't know, I have an income portfolio, which is just a fancy way of saying that I have a portfolio created specifically to generate yield in the form of dividends and option income. In order to do that I have to seek out high dividend paying stocks and ETFs, as well as find great stocks to sell options on (see Wheel Strategy).

The two ETFs we're talking about here are QYLD and XYLD. As you guessed, they have the word "Yield" in the name and so we can assume that these ETFs are created for high yield. The first one, QYLD, is an overwrite fund, it sells call options on the Nasdaq 100 (aka QQQ). The second one is also an overwrite fund, it sells call options on the S&P 500 (aka SPY). The idea is that by selling call options, these ETFs will provide a high yield and historically, they do just that.

And this leads me to the first reason that I added these two ETFs to my income generating portfolio last week. The market sold off.

The chart above shows the intense selling from about October 16th to the 30th followed by a sharp and fast rally the first few days of November.
The chart above shows the intense selling from about October 16th to the 30th followed by a sharp and fast rally the first few days of November.

The sell off last week of around 5% gave me a good entry point to start accumulating shares of these two ETFs at a really great price and start earning that dividend.

I talk a lot about scaling. If you've followed me at all, you'll instantly know why I didn't just buy the max that I could last week. Instead, I started to "accumulate" or started scaling into a position on these two ETFs. I'll expect to reach full position size on these two, maybe never. But maybe will reduce the accumulation sometime next year. The idea is that scaling into a position is a rather slow process. It is also a critically important process because... Even though the market bounced and I timed the entry perfectly, what if I didn't? What if the market continued to sell off the first week of November? In that case I could continue to scale in at an even better price instead of sitting in the corner crying.

The second reason is that we're entering the last two months of the year, seasonality kicks in. This means that historically, or maybe not quite historically, but over the last five years, very consistently, the market has bounced during November and December as illustrated in the chart below.

In the chart above, I've placed little green up arrows at the start of each November for the past five years and then I added one for last week (this was done BEFORE the bounce starting after Halloween so by the time you're reading this we already know that the market roared back with a vengeance!)

Ok but don't worry, this chart didn't predict the bounce in the first week of November, that bounce was caused by the Fed not raising rates and a bunch of other things. I still think the seasonality will be there for the remainder for the year. And SPOILER ALERT - I'm already up 3% on these two ETFs.

The third reason I added these two ETFs to my income portfolio, and probably most amazing of all is that the yield is amazing at over 10%. Now many will argue that after taxes (if you hold these in a taxable account like I do, you'll pay taxes on the dividends) the yield is starkly better than the market as a whole and in fact, you're still better off just holding QQQ or SPY. However, I'd like to point out that this line of thinking is only true in a bull market which I think is going to be muted at best for the next few years. These funds, since they are overwrite funds, should outperform the market assuming that with Quantitative Tightening (QT) in place and higher for longer interest rates, the market overall will likely trade sideways for awhile.

The final reason for adding these two overwrite funds in particular is that they are index ETFs. What does that mean, well we already believe that the major indexes should be pretty stable, so an index ETF like these or SPY or QQQ should do really well. Hence, I can depend on them not going to zero, or actually I can depend on them not dropping by more than say ~20%. Actually, since QYLD and XYLD are overwrite funds, they should lose less when the market goes down (because they bring in option premium from selling call options)... And that is awesome for building the foundation of an income portfolio.

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