Market volatility remains an elevated risk in the latter half of the year. Investors looking to harness Nasdaq volatility for income would do well to consider the NEOS Nasdaq 100 High Income ETF (QQQI), given its outperformance among peers.
Tech volatility spiked in July and remains a concern for investors headed into the months preceding the U.S. presidential election. Options strategies often benefit from volatility, particularly call-writing strategies. These strategies earn higher premiums during periods of elevated volatility and may prove a boon should tech stock volatility rise.
QQQI is actively managed and provides exposure to the Nasdaq-100 Index alongside a data-driven options strategy designed to generate high income potential. The fund 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. QQQI uses 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.
Harness Nasdaq Volatility With Outperforming QQQI
Launched a little over seven months ago, the NEOS Nasdaq 100 High Income ETF (QQQI) offers notable performance among its peers. It continues to prove popular with investors, with approximately $450 million in AUM since its Jan. 30 launch.
Image source: NEOS
In the period between 1/30/24 through 8/31/24, QQQI generated a total return of 10.38%. The fund fell only marginally behind the benchmark, while outperforming other covered call Nasdaq-centric funds.
Notably, the fund generated a distribution rate of 15.16% as of 8/31/24. Distribution rate is calculated by annualizing the last distribution and dividing it by the fund’s most recent NAV at the time of distribution. This was a magnitude of 300 basis points higher than the next closest fund’s distribution rate over the same period.
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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