Covered-call strategies gained popularity for their attractive income potential, but at a cost to upside capture. The NEOS Nasdaq 100 High Income ETF (QQQI ) is changing the game, offering better upside capture alongside tax efficient, high income.
QQQI launched at the end of January. The fund currently boasts an AUM of $234 million, with steady inflows since launch.
With distribution yields of 14.56%, it’s no wonder investors continue to flock to QQQI. Distribution yield is calculated by annualizing the last distribution and dividing it by the fund’s most recent NAV at the time of distribution.
The fund provides exposure to the Nasdaq-100 Index alongside an options strategy designed to generate high income potential. QQQI employs a strategy using covered calls to generate a premium.
Covered calls entail buying an asset while also writing a call on the underlying asset. This generates a premium but also caps the upside potential when the underlying asset appreciates. It’s a trade-off many investors are willing to make, but funds like QQQI are changing the game.
The fund is actively managed and utilizes a call spread to achieve its income goals. This spread allows for more of the underlying to potentially participate in upside market movements when they occur compared to indexed covered call option strategies.
Combining Better Upside Capture Potential With Tax Efficiency
Last month when the Nasdaq-100 closed out the month up 6.9% on a total returns basis, QQQI harnessed much of the upside. A more traditional call options index strategy, such as the Cboe Nasdaq-100 BuyWrite Index (BXN), hit its cap and remained fairly level thereafter. BXN. tracks the hypothetical performance of a portfolio comprised of the Nasdaq-100 Index and short, at-the-money calls on the Index. Meanwhile QQQI continued to climb, demonstrating the potential benefits of a call-spread strategy in upward momentum markets.
In addition to potential upside capture, the fund also offers layers of tax efficiency for investors seeking income. The options that QQQI uses are call options on the NDX and qualify as section 1256 contracts. These receive favorable tax treatment under IRS rules. The options held at year’s end are treated as if sold at fair market value on the last market day. Any capital gains or losses are taxed at 60% long-term and 40% short-term, no matter how long they were held.
Should equities rise or fall, NEOS can actively manage the call options to capture gains in the underlying assets or minimize losses. In addition, the fund’s managers also engage in tax-loss harvesting opportunities throughout the year on the call options, equity holdings, or both.
QQQI has an expense ratio of 0.68%.
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