Investing in top tech stocks and investing in income stocks are often thought of as two separate investment strategies, but the relatively new NEOS Nasdaq 100 High Income ETF (NASDAQ:QQQI) allows investors to own the Nasdaq’s (NDX) top tech stocks while collecting an attractive monthly distribution.
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I’m bullish on this new ETF from NEOS based on its portfolio of top tech stocks, attractive monthly payout schedule, and high yield. The ETF’s current distribution yield clocks in at a whopping 14.5%.
What Is the QQQI ETF’s Strategy?
According to NEOS, QQQI “seeks to generate high monthly income in a tax efficient manner with the potential for equity appreciation.”
This doesn’t tell us much, so let’s delve deeper into it. Essentially, QQQI owns the stocks in the Nasdaq 100 Index, which are typically associated with growth investing and the tech sector, and combines this with a strategy of selling call options to generate a high level of monthly income. Some of this income is also derived from the dividends of stocks that the fund holds.
While this is indeed an attractive combination, there is a tradeoff that investors must be aware of. By selling call options to generate this monthly income from options premiums, QQQI caps some of the upside on its holdings. This is because if they appreciate beyond the strike price of the call option, they will be called away, and investors will forgo any additional upside beyond the strike price.
As NEOS itself explains in the fund’s prospectus, “By writing covered call options, in return for the receipt of premiums, the Fund will give up the opportunity to benefit from potential increases in the value of the Nasdaq-100® above the exercise prices of such options, but will continue to bear the risk of declines in the value of the Nasdaq-100.”
QQQI’s Portfolio
QQQI owns 102 stocks, and its top 10 holdings account for 50.7% of the fund. You can check out an overview of QQQI’s top 10 holdings using the table below.
Unsurprisingly, because it invests in the Nasdaq 100, there is little difference between QQQI’s top holdings and those of other Nasdaq-focused ETFs like the Invesco QQQ Trust (NASDAQ:QQQ).
This gives investors exposure to many of the market’s top-performing stocks and most innovative companies, such as Nvidia (NASDAQ:NVDA) and Amazon (NASDAQ:AMZN), offering potential for upside in terms of capital appreciation.
However, QQQI is different in that it combines some of this potential upside with a large monthly distribution.
Massive Monthly Payout
QQQI launched in January and began making monthly distributions in February. Most websites will list its yield as 4.7% because that’s what the yield is on a trailing-12-month basis. But given that the fund has only been around for four months, it’s more instructive to look at its yield on a forward basis.
The amount of the distribution can vary, but so far, all have been within a range of $0.59 to $0.61.
Using QQQI’s last payout, $0.61, gives us a tantalizing distribution yield of 14.5%. This distribution yield was calculated by multiplying QQQI’s last distribution by 12 in order to annualize it and then dividing it by the share price.
It’s hard to overstate how attractive this yield is. It dwarfs the minuscule 1.4% yield of the S&P 500 (SPX) and the 4.6% risk-free yield offered by 10-year treasuries. It also easily beats the payouts of high-yield dividend ETFs and high-yield bond funds. For the time being, it is also considerably higher than the yields offered by other popular monthly dividend ETFs like the JPMorgan Equity Premium Income ETF (NYSEARCA:JEPI) and the JPMorgan Nasdaq Equity Premium Income ETF (NASDAQ:JEPQ) (another monthly dividend ETF that invests in the Nasdaq) which currently yield 7.4% and 8.8%, respectively.
Again, the fund won’t necessarily pay $0.61 every month, as the amount is variable, but given the tight range the payouts have been in so far, it seems likely that QQQI should be able to maintain its impressive double-digit distribution yield.
High Fees
One downside of the fund is its high expense ratio of 0.68%. This means that an investor putting $10,000 into the fund will pay $68 in fees annually. Assuming that QQQI returns 5% per year going forward and maintains this expense ratio, this same investor will pay $218 in fees over the course of three years, so these fees can really add up over time.
In fairness to QQQI, it is an actively managed fund with a much more complex strategy than the broad market index funds known for their low expense ratios, but investors still need to keep this in mind when making an investment decision.
Risks to Be Aware Of
While QQQI is an attractive investment opportunity, it’s important to remember that all investments have risk, and QQQI is no different. One risk to keep in mind is that the fund has only been around for a few months, so it hasn’t yet built up a track record of success, and there is no guarantee that its strategy will pan out well over time.
There’s also the risk that future distributions won’t be as high as the distributions the fund has been making so far, but this is always a risk with any of these types of ETFs.
Lastly, as discussed above, investors in QQI forgo some of the potential upside of the Nasdaq 100 in exchange for the premiums from its call options, but they still have exposure to its downside when the market declines.
That said, as long as investors understand these risks, I view this as an attractive investment opportunity.
Is QQQI Stock a Buy, According to Analysts?
Turning to Wall Street, QQQI earns a Strong Buy consensus rating based on 88 Buys, 16 Holds, and zero Sell ratings assigned in the past three months. The average QQQI stock price target of $57.14 implies 13.5% upside potential from current levels.
A Compelling Mix of Growth Potential and Yield
In conclusion, while being an income investor and investing in tech stocks are sometimes seen as two separate disciplines within the market, QQQI combines both into one attractive strategy. I’m bullish on QQQI based on its portfolio of top tech and growth stocks, which offer the potential for capital appreciation, its high yield (based on its distributions thus far), and its frequent monthly payout schedule.
Based on its recent distributions, QQQI looks like one of the most compelling income plays in the market right now.
