TappAlpha Innovation 100 Growth & Daily Income ETF (TDAQ)

TDAQ starts with a simple idea: own a basket of 100 of the world’s most innovative technology and growth companies, then use options strategies to generate monthly income from them. The fund holds the stocks for the long term but simultaneously sells call options — giving someone else the right to buy those stocks at a higher price — and pockets the income when the market doesn’t move.

The core portfolio: 100 innovation companies

TDAQ’s foundation is a portfolio of 100 large and mid-cap companies focused on innovation and technology: software firms, semiconductors, biotech, internet companies, and industrial firms investing heavily in automation. These are not the oldest, most stable dividend payers. They are growth companies — firms reinvesting cash flow into research and product development rather than paying dividends.

The fund’s managers select these 100 companies based on the strength of their innovation pipelines: Do they spend heavily on R&D? Are they disrupting their industries or creating new categories? Do they have talented engineering teams and track records of launching successful products? This is growth investing in the traditional sense — buying companies that are expanding revenues and earnings faster than the overall economy.

The reason to own these companies is straightforward: over long periods, innovation-driven companies have delivered stronger capital appreciation than mature, slow-growing peers. A company that can grow earnings 15% annually compounds wealth far better than one growing at 3%. TDAQ’s 100-company portfolio is designed to capture that long-term growth.

How the income is generated: covered calls

Here is where TDAQ differs from a simple growth ETF. On top of holding these 100 stocks, the fund’s managers sell call options on them. A call option is a contract that gives someone the right to buy a stock at a specific price (the strike price) on or before a specific date. When TDAQ sells a call, it collects a premium — cash upfront — in exchange for agreeing that if the stock rises above the strike price, it will be called away (the buyer will exercise the option and own the shares instead).

For example, if TDAQ owns Microsoft at USD 400 and sells a call option with a strike price of USD 420, it collects premium income. If Microsoft stays below USD 420, the option expires worthless, and TDAQ keeps the premium. If Microsoft rises to USD 440, the call is exercised, TDAQ loses the shares at USD 420 (missing the upside above that level), but it keeps the premium it collected.

This is called a covered call strategy because the fund “covers” the call option with ownership of the actual stock. It is the most conservative form of options selling and is widely used by income-focused funds. The monthly income TDAQ distributes to shareholders comes largely from the premiums collected on these call sales.

The tradeoff: capped upside

The benefit of selling calls is obvious: extra income. The tradeoff is equally clear. By capping potential gains (if a stock rises past the strike, TDAQ loses the additional upside), the fund sacrifices some of the growth potential of its underlying holdings. In a strongly rising market, a covered-call fund will underperform a simple stock fund because it caps gains.

TDAQ manages this by choosing strike prices that balance two goals: collecting meaningful income (which requires writing calls not too far out of the money) and preserving upside potential (which requires strikes high enough that they rarely get breached). This is a judgment call, and different fund managers make different decisions. Some prioritise income and write calls closer to current stock prices, capping upside more aggressively. Others write calls further out, sacrificing some income for more growth capture.

When covered calls win and lose

In a sideways or slightly rising market, covered calls shine. The fund collects monthly premium income, the stocks don’t get called away, and shareholders get growth plus income. In a strongly falling market, covered calls lose less than pure stock funds because the premium cushions some of the loss. In a strongly rising market, covered calls lag because the gains are capped.

This means TDAQ’s performance relative to a simple 100-company growth fund depends entirely on market direction. If innovation stocks stagnate or rise modestly, TDAQ’s income stream makes it look attractive. If they spike, TDAQ’s cap on upside becomes visible and frustrating.

How distributions work

TDAQ distributes income monthly. The payout comes from the premiums collected on call sales (the main source) plus any dividends the underlying 100 companies pay (innovation stocks typically pay little). The monthly distribution means shareholders have regular cash arriving in their accounts — an attractive feature for those focused on income.

But here is a critical point: receiving monthly distributions does not mean the fund is making money. If the underlying stocks fall by 5% but TDAQ collects 1% in monthly premiums over a few months, the total return is still negative. The distribution is a return of capital in the form of premium income, not a sign that the fund is profitable in the absolute sense.

Risks and costs

One risk is assignment. If a stock TDAQ owns rises sharply and gets called away, the fund must replace it. This creates a buy-high dynamic: when a stock is called away, it is usually because it has outperformed, and the fund has to buy a replacement at less attractive valuations. Over time, this mechanical disadvantage can drag returns.

Another risk is that by focusing on innovation companies, TDAQ concentrates in sectors that are cyclical and sentiment-driven. In periods of rising interest rates or recession fears, innovation stocks can sell off sharply. The income from covered calls will not fully offset a 20% drop in a technology-heavy portfolio.

Finally, there is the opportunity cost. By capping upside through covered calls, TDAQ sacrifices some of the long-term wealth-building that pure growth investing offers. For someone with a 20-year horizon, the monthly income may not compensate for the forgone appreciation in a secular bull market for innovation.

Expenses and liquidity

TDAQ typically has expense ratios in the 0.50% to 0.70% range, higher than a passive growth ETF but reasonable for active options management. The fund trades on an exchange with good liquidity, so buying and selling is straightforward.

Who TDAQ suits and how to research it

TDAQ appeals to growth-oriented investors who prioritise monthly income and can tolerate capped upside. It suits retirees who want to own growth stocks but need cash distributions. It can also fit in portfolios where income is valued more highly than maximum long-term appreciation.

To research TDAQ, start with the fund’s prospectus and fact sheet, which explain the covered-call strategy and current strike prices. Review the fund’s underlying 100 holdings and their sector mix — is it concentrated in semiconductors and software, or broadly diversified across innovation? Compare the fund’s distributions to its underlying stocks’ dividend yields plus the implied premium from calls (you can estimate this by comparing TDAQ’s distribution to a simple growth fund). Look at TDAQ’s performance relative to a non-call-covered growth fund through both rising and falling markets — the lag in up markets and the cushion in down markets are key metrics. Finally, understand that the appeal of TDAQ is not maximum long-term growth, but rather growth coupled with steady income, and adjust your expectations accordingly.