Introducing the Global X S&P 500 Quality Dividend Covered Call ETF (QDCC)

May 8, 2024

On May 8, 2024, we listed the Global X S&P 500 Quality Dividend Covered Call ETF (QDCC) on the New York Stock Exchange. QDCC is designed to offer investors a potential source of current income and a differentiated exposure to the S&P 500 through allocations to the top 200 companies in the index based on various quality metrics including return-on-equity (ROE), accruals, and financial leverage. The fund is intended to offer portfolios positions that are expected to share a positive relationship with volatility, as well as broad exposure to quality dividend producing companies that exist in the S&P 500.

Covered call option strategies generally seek to provide two core functions to a portfolio. The first is to produce a source of current income, which is meant to be addressed through the sale of call options. The second is diversified exposure, be it to differing asset classes, market sectors, or underlying instruments. The Global X S&P 500 Quality Dividend Covered Call ETF (QDCC) is a fund designed to potentially check both these boxes, writing call options to generate premium returns while holding a reference asset that seeks to attain quality dividend distributions.

Key Takeaways

  • The Global X S&P 500 Quality Dividend Covered Call ETF (QDCC) is a 100% covered call strategy that operates on a systematic basis, writing contracts each month in exchange for premium income.
  • Supplementing quality dividends that may be distributed by the Global X S&P 500 Quality Dividend ETF (QDIV), option premiums represent an opportunity to boost the yield on this underlying position. Additionally, by maintaining QDIV as the reference asset for the options it writes, QDCC provides investors with exposure to a specific set of underlying equities and associated risk factors.
  • A quality dividend strategy may be suited to perform well in a late-cycle environment. However, recent economic dynamics suggest that the market’s peak may be further out on the horizon.

QDCC Is a Covered Call Strategy for Income Investors Seeking Equity Exposure

The Global X S&P 500 Quality Dividend Covered Call ETF (QDCC) operates a systematic covered call option strategy wherein it purchases the Global X S&P 500 Quality Dividend ETF (QDIV) and writes at-the-money FLEX call options on the same vehicle equating to 100% of its notional holdings monthly. The use of FLEX options provides it the opportunity to customize key contract terms including strike price, exercise style, and expiration date. Consequently, the fund harnesses European-style options, which cannot be exercised prior to their expiration date, to write monthly at-the-money call options that expire on the third Friday of every month. The fund will proceed to distribute to shareholders the lower of half the premium received or 1% of the QDCC’s NAV.

Option Premiums Can Enhance Yield Without Sacrificing Quality

One of the primary criticisms associated with investing in quality dividend strategies is that investors are unable to attract the yields that they might if their holdings entailed more dividend-growth oriented positions. Indeed, as of March 28, 2024, the S&P 500 Quality High Dividend Index (the “Quality Index”), which QDIV seeks to track, provided a current yield of 2.90%, while the S&P 500 High Dividend Index (the “High Yield Index”) had a yield of 4.64.1 However, by introducing a covered call writing strategy to a portfolio like the former, featuring quality dividend equities, investors might be able to address this concern by harnessing option premia to drive up their yield and still maintain their underlying portfolio of blue-chip dividend payers. By implementing a covered call strategy, an investor is essentially capping the upside price appreciation potential that they might be able to realize by maintaining their underlying equity holdings at the strike price of the option. However, in exchange for doing so they may receive income in the form of an option premium. With a portion of this premium being redistributed to shareholders, the fund may provide a measure of supplemental yield on top of the quality dividends that it seeks to reap.

Based on the internal functions of the covered call strategy, which caps equity price appreciation potential, it might be easy to fixate on the yield potential it provides and fail to appreciate or misinterpret the other functions that exposure to the reference asset can offer. QDIV, for example, is a fund that maintains holdings in 200 quality companies of the S&P 500, as defined by metrics including return on equity, accruals, and financial leverage. The makeup has produced dividend income that investors may seek. Additionally, it has enabled the fund to witness less-material drawdowns relative to the S&P 500 and S&P 500 High Dividend Indexes during various market contractions.

Performance shown is past performance and does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when sold or redeemed, may be worth more or less than their original cost and current performance may be lower or higher than the performance quoted. For performance current to the most recent month- or quarter-end, please visit QDIV.

The defensive posture taken using QDIV as an underlying investment, relative to the S&P 500, is supplemented further by the diverse sector exposures currently laid out through quality dividend investments. The Quality Index exhibits a sector breakout with tilts toward consumer staples and industrials, as opposed to real estate and utilities where income investors are more likely to gravitate, and where high yield indexes are likely to offer exposure, as well. Relative to the broader S&P 500, with equity tilts leaning toward the information technology and financial sectors, QDCC also has a differentiated exposure.

Quality Dividend Companies May Experience Some Choppiness in the Near Term

The quality metrics that we’ve highlighted here (ROE, few accruals, soft financial leverage) are typically those attributable to large-cap companies that rarely make moves to slash or halt their dividend payouts. These are the same companies that generally maintain a long history of earnings growth, and their stocks typically do well when positive market momentum begins to subside and investors cycle out of growth-oriented positions.

In the recent market environment, investors might have been looking for this type of shift to have taken place, with momentum for the S&P 500 and Nasdaq 100 tapering, to an extent, as markets moved through the first quarter. As the period rounded out, however, momentum picked back up, signaling that the recent rally may still have legs. In conjunction with supportive economic data that’s been released across the interim, highlighting a resilient jobs market and less-extraordinary rates of inflation, which illustrate the maintained health of the economy, this momentum may leave a late-cycle trading environment on the back burner, for now.2,3

As investors in quality dividend companies wait for this environment to transpire, uncertainty surrounding future rate decisions by the Federal Reserve and ambiguity pertaining to the timetable necessary for a “flight to quality” to take place may promote elevated volatility for the underlying constituents of QDIV. This factors in to a QDIV covered call strategy in that call option premiums generally share a positive correlation with volatility. When supplementing this potential premium income with the dividend distributions already provided by its underlying ETF, QDCC may be able to provide potential investors with a competitive current yield.

Index data is for illustrative purposes only and does not represent actual Fund performance. Past performance does not guarantee future results.

Conclusion: QDCC is Designed to Supplement Quality Dividends with Premium Income

Covered call option strategies represent an interesting investment opportunity for income-driven accounts. However, when operated using an underlying reference asset such as QDIV, which already seeks to provide a competitive yield, an instrument may be created that can produce a level of income worthy of making it a primary contributor to a broader portfolio. Indeed, QDCC seeks to create this exposure, and when combining this income potential with a stock constituency of quality dividend producing companies, which may provide it a measure of loss mitigating characteristics during broad market declines, the end result is an instrument that might drive higher yield across a broader portfolio while staking an interest in quality dividend companies in the S&P 500.

Related ETFs

QDCC – Global X S&P 500 Quality Dividend Covered Call ETF

QDIV – Global X S&P 500 Quality Dividend ETF

Click the fund name above to view current performance and holdings. Holdings are subject to change. Current and future holdings are subject to risk.

Category: Articles

Topics: Income Strategies

This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information is not intended to be individual or personalized investment or tax advice and should not be used for trading purposes. Please consult a financial advisor or tax professional for more information regarding your investment and/or tax situation.

Investing involves risk, including the possible loss of principal. There is no guarantee dividends will be paid. Companies may reduce or eliminate dividends at any time. QDCC engages in options trading. An option is a contract sold by one party to another that gives the buyer the right, but not the obligation, to buy (call) or sell (put) a stock at an agreed upon price within a certain period or on a specific date. A covered call option involves holding a long position in a particular asset and writing a call option on that same asset with the goal of realizing additional income from the option premium. By selling covered call options, the fund limits its opportunity to profit from an increase in the price of the underlying index above the exercise price, but continues to bear the risk of a decline in the index. A liquid market may not exist for options held by the fund. While the fund receives premiums for writing the call options, the price it realizes from the exercise of an option could be substantially below the indices current market price.  QDCC is non-diversified.

Shares of ETFs are bought and sold at market price (not NAV) and are not individually redeemed from the Fund. Brokerage commissions will reduce returns.

Carefully consider the funds’ investment objectives, risks, and charges and expenses before investing. This and other information can be found in the funds’ full or summary prospectuses, which may be obtained at Please read the prospectus carefully before investing.

Global X Management Company LLC serves as an advisor to Global X Funds. The Funds are distributed by SEI Investments Distribution Co. (SIDCO), which is not affiliated with Global X Management Company LLC or Mirae Asset Global Investments. Global X Funds are not sponsored, endorsed, issued, sold or promoted by Standard & Poors, nor does Standard & Poors make any representations regarding the advisability of investing in the Global X Funds. Neither SIDCO, Global X nor Mirae Asset Global Investments are affiliated with Standard & Poors.