Evening Brief – 07.18.23

The “Magnificent Seven” stocks, containing the FAANG names, with Nvidia replacing Netflix, and Microsoft and Tesla, have dominated the equity market surge in recent weeks. These firms have a total market capitalization of over $11 trillion, handily outperforming the S&P 500. The “AI” enthusiasm has propelled the multi-sigma advance.

We have seen an extreme divergence between the major indices and their equal-weight counterparts. The Nasdaq 100 has a year-to-date return of 43% compared with an equal-weight return of 24%. The S&P 500 year-to-date return is 18% compared with 8% for the equal-weight index.

Considering the performance, it was announced recently that a Nasdaq 100 special rebalancing will occur before the market opens on Monday, July 24; something only done in December 1998 and May 2011. The top five companies currently have a weighting of 46.7%. Following the rebalance, the weighting will be 38.5%. This is a meaningful change and could be the catalyst for a correction, albeit a mild one, in the markets.

For investors with income as their main objective and still want to be in these mega cap stocks, there are ETFs that own these top names and deploy an active covered-call strategy. These strategies pay annual yields of more than 10% and make monthly payments.

Covered-call strategies are a good source of income generation during a time when the Federal Reserve has been raising interest rates and bonds and other fixed income assets lose value.

The benefits are that they not only take advantage of market volatility by selling option income received, these strategies also lower price volatility, as option income tends to limit price fluctuations.

The Global X NASDAQ 100 Covered-Call ETF, which owns the top ten stocks and sells calls on Invesco QQQ Trust shares, has a current dividend yield of 11.56%. With monthly payments included, it has returned around 20.6% year to date.