How They Work: The Covered Call Strategy
Both QYLD and XYLD use a buy-write strategy, which means they:
- Hold the underlying index stocks (Nasdaq-100 or S&P 500)
- Sell monthly at-the-money call options on the entire portfolio
- Collect option premiums and distribute them as monthly income
The premium collected from selling calls is the source of the high yield. However, this strategy caps upside potential - if the market rallies significantly, these ETFs will underperform their underlying index.
The NAV Erosion Problem
Both QYLD and XYLD have experienced significant NAV erosion since inception. A high distribution yield does NOT mean high total returns.
Since 2013, QYLD's NAV has declined approximately 30-40% from its initial price. XYLD has fared slightly better but still shows meaningful erosion.
Why does this happen? In strong bull markets, the covered call strategy gives away upside gains. The ETF collects premium, but misses the rally. Over time, the gap between "what the index did" and "what the ETF captured" compounds.
QYLD: The Case For and Against
Pros
- Higher yield: Tech volatility means fatter option premiums
- Monthly income: Consistent distributions for cash flow
- Large AUM: High liquidity, tight spreads
Cons
- Concentrated sector risk: Tech-heavy (Apple, Microsoft, NVIDIA)
- Greater NAV erosion: Higher volatility leads to more upside capture loss
- Tax inefficient: 100% ordinary income distributions
XYLD: The Case For and Against
Pros
- Diversification: S&P 500 spans all sectors
- More stable: Lower volatility than Nasdaq
- Better NAV preservation: Historically less erosion than QYLD
Cons
- Lower yield: Less volatile underlying = smaller premiums
- Still has erosion: Not immune to NAV decline
- Same tax treatment: Ordinary income, no special advantages
When to Choose QYLD
Choose QYLD if you:
- Need maximum current income
- Are in a tax-advantaged account (IRA, Roth)
- Believe tech will stay volatile but range-bound
- Use it as a satellite position (5-15% of portfolio)
When to Choose XYLD
Choose XYLD if you:
- Want more diversified income exposure
- Prefer slightly lower risk over maximum yield
- Are building a core income allocation
- Want exposure to all 11 S&P sectors
The DivAgent Verdict
For most income investors, we recommend XYLD over QYLD for core allocations.
The additional yield from QYLD does not compensate for its concentration risk and greater NAV erosion. However, both ETFs should be considered Tier 4 (Volatility Harvest) positions - meaning they belong in the "accelerator" portion of your portfolio, not the foundation.
If you want covered call exposure, consider:
- JEPI/JEPQ: Lower erosion, defensive stock selection
- XYLD: Broad market covered calls
- QYLD: Tech-focused yield boost (satellite only)
Use our NAV Erosion Calculator to see the true total return of QYLD or XYLD over different time periods. High yield means nothing if NAV is declining.
Open NAV Calculator →