The BetaShares NASDAQ 100 ETF (ASX: NDQ) is one of the most high-profile ASX-listed exchange-traded funds (ETFs). It has built a reputation for capital growth, though not for passive income.
In the past five years, it has achieved an average annual return of 22.5%. I'll quickly note that past performance is not a reliable indicator of future performance, particularly with a return of that size.
The fund has significantly benefited from the strength of the capital growth of its holdings, including Microsoft, Amazon, Apple, Nvidia, Alphabet, Broadcom, Apple and Meta Platforms.
None of those businesses are known to provide high levels of passive income because of their low dividend yields.
But, that doesn't necessarily mean we can't create passive income ourselves.
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Access a portion of the capital gains
According to BetaShares, the NDQ ETF has a 12-month distribution yield of 1.9%. In my eyes, that's not enough to be very useful.
What if we could get a passive income yield of 5% from the fund? That would be much nicer.
Investors can use some of the fund's capital gains and sell some units each year to generate that cash flow.
For example, let's imagine an Aussie investor had $20,000 in NDQ ETF units. If the fund delivered a return of 10%, it'd become worth $22,000. Let's say the investor sells 5% of the fund value at the start of the year – $1,000. The investor would have $1,000 of cash flow and an ending portfolio value of $21,000. After owning an asset for 12 months, Aussie individual investors can benefit from the capital gains discount. I'd also turn on the distribution reinvestment plan (DRP) to ensure the fund value is growing as much as it can.
The NDQ ETF isn't going to consistently deliver a 10% return – sometimes it will be better and sometimes worse (or even negative). But, for my example, let's assume it does it again.
If the BetaShares NASDAQ 100 ETF rose by 10% again, it'd become worth $23,100. A 5% sale of the starting value for that year would be $1,050 of 'passive income', and the investor would end with a portfolio balance of $22,050.
Foolish takeaway
I think this could be an effective strategy as long as the fund's net returns were stronger than the sales over time. I wouldn't suggest selling more than 5% because future returns may be lower than in the past. Plus, it's important to keep some gains in the 'bank' for when the inevitable volatility comes along.
With its major exposure to impressive US tech giants, I think the NDQ ETF could be one of the most effective options for implementing the strategy I've outlined.
