Dividend ETFs that sell call options to generate high yields and monthly payouts have become popular, and blue-chip asset manager Goldman Sachs (GS) has its own entrant into the space with its new Goldman Sachs Nasdaq 100 Core Premium Income ETF (GPIQ).
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I’m bullish on this new entrant into the space based on its sizable, double-digit distribution yield (explained in detail below), appealing monthly payout schedule, and diversified portfolio of highly-rated large-cap technology stocks.
What Is the GPIQ ETF’s Strategy?
According to Goldman Sachs, GPIQ “seeks current income while maintaining prospects for capital appreciation.”
Like other popular monthly dividend ETFs, Goldman Sachs explains that GPIQ “aims to generate a consistent monthly distribution rate generally from options premium and equity dividends.”
GPIQ invests in the stocks in the Nasdaq 100 and generates a steady stream of monthly income for its holders through dividends from its holdings and income received for selling covered calls against these holdings. Goldman states that GPIQ will typically sell calls in an amount ranging between 25% and 75% of the value of the fund’s equity portfolio. The fund also has the ability to invest in and sell calls on other ETFs and over-the-counter (OTC) instruments.
How Does GPIQ Generate Income?
Let’s take a closer look at how this strategy works in practice. GPIQ sells covered calls on the stocks it holds and uses the income it receives from selling these call contracts to distribute income to its holders on a monthly basis. This is an effective strategy for generating a sizable amount of income.
The inherent tradeoff that investors need to be aware of here is that GPIQ likely sacrifices a degree of potential upside from capital appreciation. When its holdings rise above the strike price for the calls it is selling, it doesn’t participate in any of the gains above this strike price because it is obligated to sell its shares at the contracted price.
As Goldman itself explains in the fund’s summary prospectus, “In rising markets where the aggregate
appreciation of the underlying index over its exercise price exceeds the income from premiums, a portfolio with a call writing strategy could underperform the same portfolio without the options.”
Let’s look at an example using GPIQ’s top holding, Apple (AAPL). GPIQ hypothetically sells Apple calls set to expire in a month with a strike price of $250. The fund theoretically receives a premium of $500 from the buyer of the options for selling these calls. However, if the shares of Apple settle at $275 on the closing date, GPIQ is contractually obligated to sell these shares to the buyer of the call for the contracted price of $250, meaning that it isn’t entitled to any of the gains above $250.
In this theoretical example, GPIQ and its holders benefited from the immediate income of $500 but missed out on $2,500 worth of capital appreciation (the $25 per share gain above $250 on 100 shares, the total number of shares in one call contract).
On the other hand, if AAPL stock remains below the strike price, once the contract closes, GPIQ can sell new calls against it and repeat the process.
This example is just to illustrate that, like any investment, GPIQ has some pros and cons. As long as investors understand this dynamic, this can be an attractive and effective strategy for generating real income on a monthly basis.
Double-Digit Dividend Yield
Now that we understand the tradeoffs of this strategy, let’s focus on what type of yield GPIQ can generate. Here’s a spoiler alert: it’s pretty compelling.
On paper, GPIQ’s dividend yield of 6.5% that you will see on most websites is already fairly attractive but perhaps doesn’t stand out in a world with many high-yielding investment vehicles.
However, keep in mind that GPIQ only launched this past December, and it makes a payment each month. Therefore, this trailing 12-month yield doesn’t really paint a clear picture of what GPIQ’s yield for a full year will look like (since it has only been around for long enough to make eight monthly payments).
To get an idea of what GPIQ’s yield will look like on a forward basis, we can use its distribution yield, which is calculated by using the fund’s most recent payment and multiplying it by 12. Looking at this metric, GPIQ looks even more attractive as an income investment. The fund paid out $0.42 per share for July. So, based on this payment (when annualized) and its current share price of $48.88, GPIQ’s current distribution yield is a far more attractive 10.3%.
It’s hard not to be excited about a double-digit yield — even with elevated interest rates in the U.S., this is more than double the yield of one-year treasury bonds.
It must be noted that there is no guarantee that GPIQ will make a monthly payout or that its payout will remain at this level. However, so far, it has made a payout each and every month, and all of its payments have ranged between $0.38 and $0.42, so this should at least give us a fairly accurate gauge of its yield.
Highly-Rated Holdings
GPIQ holds 103 stocks, and its top 10 holdings make up 52.1% of the fund. You can check out an overview of GPIQ’s top 10 holdings below using TipRanks’ holdings tool.
Given GPIQ’s strategy, its top holdings unsurprisingly mirror those of the Nasdaq 100, so you’ll find all of today’s popular large-cap tech stocks like Apple, Microsoft (MSFT), Nvidia (NVDA), Broadcom (AVGO), Amazon (AMZN), and more among GPIQ’s top 10 holdings.
These top holdings collectively receive some excellent ratings from TipRanks’ proprietary Smart Score system. The Smart Score is a quantitative stock scoring system created by TipRanks. It gives stocks a score from 1 to 10 based on eight market key factors. A score of 8 or above is equivalent to an Outperform rating.
Seven out of GPIQ’s top 10 holdings receive Outperform-equivalent Smart Scores of 8 or above, while Broadcom, Amazon, Meta Platforms (META), and Alphabet (GOOGL) all earn “Perfect 10” Smart Scores. GPIQ also receives an Outperform-equivalent ETF Smart Score of 8 out of 10.
Expense Ratio
GPIQ charges an expense ratio of 0.29%, meaning an investor putting $10,000 into the fund will pay just $29 in expenses annually. For an actively-managed ETF utilizing a complex strategy, this isn’t a bad expense ratio at all.
Note that this current expense ratio includes a fee waiver of 0.06% until at least December 31, 2024, as the new fund seeks to accumulate more assets under management. After this point, the expense ratio could rise to 0.35%.
Is GPIQ Stock a Buy, According to Analysts?
Turning to Wall Street, GPIQ earns a Moderate Buy consensus rating based on 86 Buys, 18 Holds, and zero Sell ratings assigned in the past three months. The average GPIQ stock price target of $52.79 implies 8.6% upside potential from current levels.
A Great Option for Income Investors
The GPIQ ETF is an exciting option for income investors. I’m bullish on this ETF based on its attractive double-digit distribution yield, appealing schedule of frequent payouts, and portfolio of highly-rated stocks. As long as investors understand the potential tradeoffs in terms of capital appreciation discussed in-depth above in this article, then GPIQ looks like a great option for adding monthly income to portfolios.
