Well, it’s the official end of 2024 and 2025 will be here in just a few short hours. As such, I think Proverbs 3:5-6 is a fitting verse for the upcoming year. “Trust in the Lord with all your heart, and do not lean on your own understanding. In all your ways acknowledge him, and he will make straight your paths.”
Now, let’s focus in on the relatively unknown QQA ETF or, the Invesco QQQ Income Advantage ETF. QQA is an investment vehicle that combines exposure to the Nasdaq 100 Index with an active option income strategy. QQA’s primary objective is to return investors an above average income, improved potential for growth, and all with a reduced volatility profile.
Additionally, QQA is managed by the same company responsible for QQQ. It seems perfectly reasonable to me to ask the question; who knows the QQQ ETF better than that funds own management team? This alone makes QQA an interesting, albeit newer contender to the income ETF space.
Finally, if you want to see how QQA is performing within my portfolio, you can check it out on my Unqualified Investors Portfolio page. If you’re looking for an income ETF that tracks the S&P500 then you may want to have a look at this recent post; “SPYI v ISPY: 1 Clear Winner between Two High-Income ETF’s”.
Post Agenda
QQA ETF Overview
The QQA ETF is a new fund with only 6 months of history as of today. They were launched on July 17, 2024 with the chief goal of providing potential investors an above average income. Additionally, the fund seeks to maintain some of the growth prospects of the QQQ ETF they track.
The fund, through the use of ELN’s or Equity Linked Notes, creates a covered call strategy similar to that of JEPI or the JPMorgan Equity Premium Income ETF. The structure of the ELN, essentially a covered call, creates a premium that is then returned to investors.
The QQA ETF Fund Prospectus does make it abundantly clear they intend to track the underlying with what they call, a “full replication” methodology. Essentially, they hold an equal percentage of the investments within the QQQ ETF itself. Then, through the use of the aforementioned ELN’s, generate income. Not as clean as I would prefer but it has become pretty standard within the income ETF industry.
While the above strategy is their primary objective the prospectus does also mention something I haven’t seen elsewhere. Shortly into the “Principal Investment Strategies” section they mention the ability to hold additional derivative products as a hedge against adverse market movements. While the benefit, if there is one, remains to be seen it is nice to know that the fund doesn’t have to sit on their hands if the market begins to fall preciptiously.
QQA ETF Expense Ratio
QQA has bucked the prevailing trend in the high yield ETF space by making their expense ratio among the lowest I’ve seen today. With income or Nasdaq-100 income funds popping up seemingly by the day, I believe those that offer the best value will eventually become favored. But, that’s just my opinion.
Regardless, QQA has an expense ratio of just 0.29% which is lower than the wildly popular JEPI or JEPQ ETF’s both maintaining a 0.35% expense. Additionally, QQA has waived their expense fee until June 30th, 2025. Making their current expense ratio a whopping 0.00%! Not a bad proposition for a fund that largely mimics the two income focused alternatives I mentioned.
Liquidity
To say liquidity has been light would be an understatement at this time. However, given the brand power of Invesco and their flagship ETF, QQQ, I suspect that won’t last for long. But again, that’s just my opinion. If Invesco never advocates or markets QQA then liquidity may continue to flounder.
As of today, the ETF has an average daily trading volume of just 21,158 shares. Compare that to JEPI’s average volume of over 3 million and it’s clear they’re way behind the curve. That said, JEPI has existed since May of 2020 so it’s not exactly a fair comparison.
In all, liquidity just isn’t there at present and work needs to be done advocating for QQA throughout the investment community. If they do, then I believe investors will recognize the value proposition when considering their next income focused ETF.
Risk Overview
Investing in QQA, as with all equity investments, carries some degree of risk. Market risk, at today’s lofty valuations couldn’t be overstated and only time will tell how QQA weathers the eventual decline.
However, when considering QQA specifically there are a few risks to highlight;
- Sector Concentration Risk – The fund is heavily weighted to the technology sector.
- Options Strategy Risk – Limits potential upside appreciation potential.
- New Fund Risk – QQA has a limited operating history.
- Liquidity Risk – May be difficult to close a position during a tumultuous period.
- ELN Risk – Typically unsecured debt.
Now, while those don’t sound exactly appealing, keep in mind they aren’t unique to the QQA ETF alone. These newer risks are quickly becoming par for the course with regard to income focused investments. Only in time will we learn exactly what and how these risks reach out to sting us as investors.
QQA Pros & Cons
Like any income focused ETF the greatest pro in their favor is the higher income potential. Thus, I’ll avoid it in my discussion below, but do know that is largely the greatest pro to owning QQA or any income investment.
QQA ETF Pros
- Exposure to the technology sector and the innovation they provide.
- Lower volatility profile and downside profile inherent to higher yield investments.
- Lower expense ratio than similar funds and a zero expense ratio until June 30th, 2025.
QQA ETF Cons
- Limited track record with minimal performance history, as of today.
- Potentially reduced upside appreciation prospects.
- Complexity of the funds income production through ELN’s.
Investor Suitability
Primarily, QQA is most suitable to investors seeking higher monthly income. However, investors wanting exposure to the Q’s with some downside protection may also enjoy QQA. This lower volatility profile may be preferred with valuations where they are today.
That said, the fund does seek to appreciate and a longer time horizon investor would also be rewarded. Both through income today and appreciation over time.
Still, investors should consider the risks carefully and determine if it suits their particular tolerance. The relative newness of the fund coupled with current liquidity concerns may mean the juice isn’t worth the squeeze.
Final Thoughts
In all, the fund is new and with that comes a great deal of unknown. Not a feature most investors are particularly comfortable with. That said, everything was new at some point and avoiding QQA on those grounds alone may mean missing a great opportunity. The fund does offer an above average yield, currently around 10%, and the ability for management to take action if needed. Add to it the ability to invest into the QQQ but with a guaranteed higher income and the prospects for the fund are certainly there.
Still, the risks are real and only time can answer the bigger questions we all have. Will this fund exist in 5, 10, or 20 years? How does the fund perform if QQQ falls by 20% or more? All great questions and I guess if you’re up for it, meet me back here in 2030 and we will see.
Until the next post.
God bless,
Jeff
