The new REX AI Equity Premium Income ETF (AIPI) combines a portfolio of AI stocks with a jaw-dropping yield of 35.1% (based on its distribution rate, which we’ll discuss below), and monthly payouts to create a unique investment opportunity.
I’m bullish on this brand new ETF based on this incredible yield and its frequent payout schedule. Read on for more.
What Is the AIPI ETF’s Strategy?
As fund sponsor Rex Shares explains, AIPI owns AI stocks and writes covered calls to generate “enhanced income potential.” It invests at least 80% of its portfolio in an index of AI-related stocks called the “BITA AI Leaders Select Index,” which includes AI hardware stocks, AI software stocks, and the stocks of companies creating AI-enabling infrastructure.
There are now quite a few ETFs running similar variations of this strategy, most prominently the JPMorgan Equity Premium Income ETF (JEPI), and they have been a hit as many investors are looking for both high yield and steady, frequent income, which these ETFs deliver.
How Does it Work?
AIPI sells out-of-the-money covered call options against its holdings. It uses the income it receives from selling these calls to pay its investors monthly distributions.
Many of the AI stocks that AIPI holds are fairly volatile and draw a great deal of investor interest, allowing AIPI to generate considerable options premiums due to the high level of activity around these stocks. For example, AIPI’s largest holding, Nvidia (NVDA), is frequently the most active stock in terms of options activity.
This can be an effective way to generate a large yield. However, investors should be mindful of the potential risks involved. The caveat to this strategy is that investors, more or less, agree to potentially sacrifice some degree of capital appreciation. If the price of AIPI’s holdings rises above the call options’ strike price, AIPI holders forfeit the chance to benefit from this additional upside.
REX Shares explains that the fund aims to sell calls that are “slightly out of the money,” as this provides some room for capital appreciation in addition to income.
Here’s an example to clarify: Suppose AIPI sells one contract (consisting of 100 shares) of August 30 Nvidia calls with a $140 strike price. The fund will receive a premium of ~$250 from the buyer of the options for each of the contracts it sells.
Imagine that Nvidia unveils a new chip with advanced AI capabilities or releases a blowout earnings report. The shares of Nvidia then rise to $150 by the closing date, and the fund is contractually obligated to sell these shares to the buyer of the call for the contracted price of $140. As a result, holders miss out on any gains above that price, losing the opportunity to benefit from an additional $10 per share, or $1,000 in total.
If the shares of Nvidia stay below the strike price, the fund can sell new calls and repeat the process in perpetuity to continually generate more income.
As long as investors understand this dynamic and are okay with the fact that they will likely sacrifice some gains from time to time, this can be an attractive instrument for collecting significant income.
Gargantuan Yield
The level of AIPI’s monthly payout is not guaranteed and can vary from month to month, and it should also be noted that AIPI doesn’t guarantee that it will make a payment each month.
That said, AIPI was launched in June and made its first payout in July with a payment of $1.48. Most websites will show AIPI’s yield as a fairly lackluster 2.9%. But this is its yield on a trailing 12-month basis, and the fund has only been around for two months.
Therefore, evaluating AIPI’s yield on a forward basis is more instructive.
Using the ETF’s most recent payout of $1.48 in June as the amount of the monthly distribution going forward, the fund boasts an incredible distribution rate of 35.1% (based on its current share price of $50.59 and assuming 12 monthly payouts of $1.48).
It’s probably unrealistic to expect each of AIPI’s future payouts to remain this high, but even if they decrease markedly from here, AIPI still appears to be a very attractive high-yield investment opportunity.
Also, AIPI offers a higher yield than other popular monthly dividend ETFs that utilize similar strategies. The JPMorgan Equity Premium Income ETF (JEPI) and its sister fund, the JPMorgan Nasdaq Equity Premium Income ETF (JEPQ), yield 7.1% and 9.3%, respectively.
Even the REX FANG Innovation & Premium Income ETF (FEPI), another similar ETF from REX Shares, features a lower yield than AIPI. The fund was launched last October and has made nine monthly payouts thus far. Using its most recent payout, it features a distribution rate of 25.4%, which is impressive but still considerably lower than AIPI’s.
Additionally, AIPI intends to pay a distribution each month, making it a good option for investors looking for a steady stream of frequent income.
While it remains to be seen if AIPI can continue to maintain this type of yield, it still looks like a can’t-miss opportunity for dividend investors.
AIPI’s Holdings
AIPI holds 25 stocks, and its top 10 holdings account for 56.0% of its assets.
Below, you’ll find an overview of AIPI’s top 10 holdings using TipRanks’ holdings tool.
As the name implies, AIPI’s holdings are mainly well-known AI stocks. These include leading semiconductor names like Nvidia (NVDA), Advanced Micro Devices (AMD), and Broadcom (AVGO), along with mega-cap tech players like Apple (AAPL) and Microsoft (MSFT). Other relevant names in the space, such as Palantir (PLTR) and Super Micro Computer (SMCI), are also included.
Mind the Risks
It should be noted that there are some risks when investing in AIPI, just like with any investment opportunity. In addition to the aforementioned risks inherent to the strategy discussed above, it’s important to note that this is a brand-new fund with a strategy that has yet to prove itself over time or across different market conditions.
What Does AIPI Cost?
One downside to consider is that AIPI charges a fairly high expense ratio of 0.65%, meaning that an investor in the fund will pay $65 in fees on a $10,000 investment annually.
While this is fairly expensive, it’s perhaps unsurprising as this is currently a very small fund with just $30.5 million in assets under management (AUM), and employs a complex, actively managed strategy.
Is AIPI Stock a Buy?
Turning to Wall Street, AIPI earns a Moderate Buy consensus rating based on 22 Buys, five Holds, and zero Sell ratings assigned in the past three months. The average AIPI stock price target of $58.08 implies 15.3% upside potential from current levels.
A Can’t-Miss ETF for Income Investors
I’m bullish on AIPI based on its hard-to-beat distribution rate of over 35%.1 and its attractive monthly payout schedule.
Investors should be aware of the risks associated with this tiny, brand-new ETF with an untested strategy. Its approach may lead to some sacrifices in capital appreciation over time. Therefore, AIPI is likely best suited as a component within a diversified investment portfolio.
These risks aside, AIPI is clearly a compelling investment opportunity for dividend investors.
