Published:
September 15, 2008
Started in January 2007, the
Nasdaq Premium Income and Growth Fund (Nasdaq: QQQX, $15.07) invests nearly all of its assets in a
portfolio designed to track the Nasdaq-100 Index. This
closed-end fund is managed by IQ Investment Advisors, which
recently became a part of the Nuveen Group.
Unlike the more commonly known Nasdaq Composite, which lists
more than 3,000 companies, the Nasdaq-100 comprises 100 of the
largest domestic and international non-financial companies
listed on the Nasdaq Exchange.
Since the June 2007 quarter, QQQX has distributed $0.4625
quarterly per share, or $1.85 a year. At current prices, the fund is
yielding more than 12% ($1.85/$15.07). Management fees are a
reasonable 1.05% annually.
While its key holdings are found in Nasdaq stocks, the fund also
invests in stocks outside the index. As of June 30, 2008, for
example, it held shares in Boeing (NYSE: BA). At that time, roughly 66% of its
portfolio was invested in information technology, with another
16% devoted to healthcare. Apple (Nasdaq: AAPL) was its largest
individual position and constituted more than 12% of the
portfolio, with Microsoft (Nasdaq: MSFT) second at just over 6%.
To generate investment income for paying dividends, QQQX writes
call options on the Nasdaq-100 Index. As of the latest quarter,
the fund wrote options on approximately 45% of its $330 million
portfolio.
Since the fund owns underlying stocks that replicate the
performance of the index, these
calls are similar to covered
calls written by individual investors who hold underlying
positions. However, in QQQX's case, the stocks can not be
called away since the calls are written on the index. Instead,
the fund has to buy back the option at a higher price if the
index goes up.
QQQX will do best in a Nasdaq bull market when it will profit on
its investment positions. In a Nasdaq bear market, it will
perform better when the implied volatility of Nasdaq-100 options
is higher. Premiums for options rise with higher volatility,
increasing the cash QQQX receives for each option contract it
sells. The past
several months have seen reasonably high volatility. As a result, the fund has held up relatively
well, providing +1.3% returns in the second quarter ended
June 30th, better than its benchmark's -0.9% decline and also well
ahead of the broader S&P 500's
-6.1% loss. QQQX has traded at a
substantial discount to its net asset value over the past year,
and the current discount of more than -10% is about in the middle of the
discount range.
QQQX provides a potent combination of income and capital gains
potential and is particularly well-suited to a Nasdaq bull market. At
present, its yield of more than 12% may be attractive to patient
value seekers who are willing to hold for the long term while
the index puts in a bottom.
Good investing!
Carla Pasternak
Editor
High-Yield
Investing
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