💰QQQI: The Covered Call ETF You’ve Been Looking For

👉 Free Webinar / Livestream

TL;DR — I’m hosting a covered call webinar about everything in this article on February 7 alongside my podcast co-host Robert Croak.

During this webinar I’ll be walking everyone through my Tesla covered call option contract strategy, we’ll learn from the experts at NEOS about how they approach covered calls, and I’ll share with you all a few other covered call option contract stock ideas to try. 

The webinar is taking place at 4pm EST on February 7th — click here to save your spot!

⚡️ Introduction:

In case you’re new here — I’m building a $2M Dividend Growth Portfolio from scratch.

I’m doing this for one reason, and one reason only — to generate enough monthly income to become “financially independent.”

To me, financial independence is defined as “my monthly expenses are completely offset by the income my investments generate for me.” Think about it like this — if my investments generate $5K per month in post-tax income, and I spend $5K per month to live my life (groceries, mortgage, utilities, transportation, etc.) then I’m financially independent. 

Well, kinda. 

To me, retirement means I don’t have to trade time for money anymore. I don’t need to spend countless hours each day working for money I would then use to keep a roof over my head or food in my stomach — my investments do that for me. 

I own my time! 

The reason I chose $2M as my end-goal was because of the Trinity Study.

This study claims you can withdraw 4% of your total portfolio’s balance every year (adjusted for inflation) and “never” run out of money. Of course, never is a very strong word and no one can predict the future.

But, this portfolio income could literally last me decades — essentially retiring me in my mid-30s. 

4% of $2M is $80,000 — assuming this was all of the money I had earned during the calendar year and that I was married and filed jointly … It's all tax-free. 

With that being said, my “road to $2M” isn’t strictly via dividend growth stocks.

Of course, dividend growth stocks will make up the portfolio in its final form — but the journey has included Big Tech, Cryptocurrency, Risky Tech, and other ideas. And for good reason!

I’m up $20K on my invested capital in the cryptocurrency portfolio, $5K from Big Tech, $6K from Risky Tech, and I’ve even generated $4K in passive income by selling covered calls against my Tesla stock. Whatever route can get us to “financial independence” the quickest is my route of choice. 

In this post, I’m going to:

• Breakdown what QQQI is

• How it generates double-digit dividend yields for their investors

• Where it fits inside of my Dividend Growth Portfolio

⚡️ What is QQQI? 

The NEOS Nasdaq-100 High Income ETF (QQQI) is an ETF that aims to offer high monthly income in a tax-efficient manner and upside potential when the Nasdaq-100 Index rises.

Let’s break that down — an ETF is a basket of stocks. 

In this case, the basket is constructed to replicate the holdings of the Nasdaq-100 Index. Remember, the Nasdaq-100 Index sits right next to the S&P 500 Index in popularity and portfolio construction. This index tracks the total performance of the 100 largest, most-actively traded stocks listed on the Nasdaq. Think Apple, Microsoft, Nvidia, Broadcom, Meta Platforms, Tesla … you get the picture. 

Here’s a chart of the share price return of the Nasdaq-100 Index going all the way back to the Dot-Com Bubble of 2000. 

The Nasdaq-100 Index delivered +55.1% returns for its investors in 2023, the best year since 1999. Again, this was largely due to the AI craze we saw by companies like Microsoft, Nvidia, and others — but incredibly impressive nonetheless. 

A single letter — I. 

That letter stands for income.

Think about it like this — a 55% return in an investment is awesome. However, to realize that return in your bank account, you’ll need to sell shares of stock. Considering the dividend yield of the Nasdaq-100 Index is 0.42%, 99.58% of that return was in the form of share price appreciation — not cash dividends paid to you.

But what if there was an ETF that aimed to offer exposure to the Nasdaq-100 Index while also optimizing for tax-efficient income for their shareholders? 

The NEOS team has successfully done this with their S&P 500 Index equivalent ETF, SPYI — paying a 12.09% annual distribution yield (as of 1/31/24) to investors while also allowing their share price to trend higher over time. SPYI delivered a total return of 18.1% in 2023 — with 12% of that being paid out as monthly income to their shareholders. 

I’m a shareholder. I receive monthly income from SPYI. It’s wonderful. 

Now the team is introducing QQQI — a way for income-focused investors to have exposure to the Nasdaq-100, in a tax-efficient manner. 

⚡️ How QQQI Works:

Let’s start by understanding how the normal QQQ ETF works — by investing into the same stocks that represent the Nasdaq-100 Index, the QQQ ETF experiences the same return as the Nasdaq-100 Index. 

Simple enough, right? Have the same stuff, experience the same returns. I mean, this is how every index-focused ETF works, haha. 

They hold the exact same stocks in the exact same weightings as the Nasdaq-100 Index, as shown below. Therefore it’ll perform similarly to the Nasdaq-100 Index, but why not exactly the same...?

Covered call option contracts. If that sentence was a foreign language to you, read this article. I break down exactly how they work, and how I’ve used them to generate thousands of dollars of income for my own portfolio. 

The NEOS team sells covered call option contracts against their holdings, just like I did with Tesla, to produce additional income for their investors. It’s that simple. 

Let’s break that down — NEOS says “We’re going to sell Nasdaq-100 covered calls against our holdings. We’re going to choose a date that’s about 1-month into the future, and a strike price up to 5% out-of-the-money.”

In return, they receive premium income from the buyer of those option contracts. They take that premium income and pay it out in the form of a monthly distribution to their shareholders. 

That’s it! 

Now that you understand the high-level strategy — let’s walk through the specific intricacies that set them apart from other Nasdaq-100 income-focused ETFs on the market today. 

👉 Section 1256 Contracts 

These are the type of “option contracts” they chose to use when selling their covered calls. Long-story short, the income produced when using these contracts is taxed at 60% long-term capital gains, and 40% short-term capital gains.

Compare this to the 100% short-term capital gains investors have to pay on their income when selling “normal” covered calls, like my Tesla options. Over the long-haul, we’re talking about material savings on taxes when Uncle Sam comes knocking. 

👉 Out-of-the-Money (OTM) 

By selling their option contracts “OTM,” they’re ensuring their investors can participate in upside share price appreciation.

Here’s what I mean — when you sell a covered call, you’re guaranteeing your return upfront. If the price of the underlying equity trades higher than the total amount of premium you’ve received, too bad.

Because the NEOS team is selling covered call option contracts up to 5% OTM, investors are able to participate in some upside share price appreciation. 

Sure, if the Nasdaq-100 increases by +10% in a single month — QQQI investors won’t realize that entire 10% return because they’re only writing contracts to include up to +5% in share price appreciation.

But that’s the “trade-off” you make when you’re trying to optimize for tax-efficient income vs. share price appreciation. 

⚡️ How QQQI Fits Inside of My Portfolio:

Again, my goal with the Dividend Growth Portfolio is to generate enough monthly income to offset my living expenses.

When I crafted this portfolio 12-months ago, I chose $2M because of the Trinity Study and its 4% rule.

However, as financial products become more and more sophisticated (QQQI & SPYI, for example), I’m able to produce intense double-digit dividend yields while staying invested in indices that have trended higher for several decades — a win / win in my book. 

As you might remember from this post, I had QQQX in my portfolio as a way to try and generate outsized dividend yields while tracking the Nasdaq-100. However, QQQX is a far inferior product to QQQI (at-the-money contracts, closed fund, etc.) — which means it’s time to switch!

I’ve gone ahead and sold all shares of QQQX out of my portfolio, and will be replacing those shares with QQQI — allowing me to realize (mathematically speaking) a larger post-tax return. 

As this position grows, I’ll be paid larger and larger monthly dividends (distributions) — allowing me to inch closer and closer to financial independence. 

Disclaimer: This is not financial advice or recommendation for any investment. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.