QQQI ETF: How I am Getting ready for Volatility in 2025

Introduction

All through the final two years, the inventory market has skilled above-average complete returns — with the Nasdaq-100 delivering buyers a 54.8% return in 2023 and a 25.5% return in 2024. Evaluate this to the 11.8% common annual return the Nasdaq-100 has delivered since its inception in 1985.

As we enter 2025, not solely have we skilled the most effective back-to-back years within the inventory market since 1997 & 1998 — we’re objectively over-valued, traditionally talking. At time of writing, the P/E ratio of the Nasdaq-100 sits at 31.3X — materially larger than the 10-year median of 25.3X. With that being mentioned, I might argue valuations aren’t what finish secular bull markets. Throughout secular bull markets, valuations can all the time go larger — similar to throughout secular bear markets valuations can all the time go decrease as worry and greed transfer markets from one aspect to the opposite very like a pendulum.

Beneath the Trump Administration, I might argue the Federal Reserve will proceed to chop rates of interest. If you pair these charge cuts with a wholesome financial system you get the under chart — historical past tells us we may expertise double-digit beneficial properties.

With that being mentioned, I am a agency believer that we’re not going to keep away from market volatility in 2025 to the diploma we did all through each 2023 and 2024. Throughout each of these years the biggest decline the index skilled was -10%, one throughout July 2023 and one other throughout August 2024. Evaluate these -10% declines to the typical -12-15% annual decline we have traditionally skilled throughout bull markets, in keeping with JPMorgan Chase.

Pair this anticipated heightened volatility with a traditionally risky Trump Administration and you’ve got your self a recipe for some unpredictable returns within the Nasdaq-100 all through 2025.

Introducing the NEOS Nasdaq-100 Excessive Revenue ETF (QQQI) — how I am making ready for volatility in 2025 with out leaving an excessive amount of potential upside on the desk in case I am improper.

What’s QQQI?

The NEOS Nasdaq-100 Excessive Revenue ETF (QQQI) is a coated name ETF that seeks to distribute excessive month-to-month revenue to their buyers. They generate this excessive month-to-month revenue by investing into all the underlying constituents of the Nasdaq-100 and implementing a data-driven name choice technique.

A number of issues set this fund aside from their friends like JEPQ and QYLD.

In contrast to JEPQ, the NEOS Nasdaq-100 Excessive Revenue ETF (QQQI) holds all 100 constituents of the Nasdaq-100 index. There is not any “cherry selecting” of names their fund managers suppose could be under-valued. As an alternative, QQQI buyers know precisely what they’re signing up for.

Moreover, QQQI’s data-driven name choice technique makes use of Nasdaq-100 Index Choices which is necessary for 2 causes:

1. Index choices are labeled as Part 1256 contracts by the IRS. This implies irrespective of the holding interval, all revenue generated from these contracts are taxed at 60% long-term capital beneficial properties and 40% short-term capital beneficial properties.
2. Moreover, the fund portfolio managers goal to reap losses inside the portfolio to both offset beneficial properties within the choice contracts or fairness positions – which may enable fund distributions to be labeled as a “Return of Capital.”
   • Return of Capital distributions aren’t taxable within the yr they’re acquired, as a substitute buyers would pay long-term capital beneficial properties on their distributions if / once they ever determine to promote their shares. That is particularly necessary for buyers seeking to decrease their annual tax burden as you’re primarily changing short-term revenue distribution funds into long-term capital beneficial properties therapy within the occasion of a future sale of the ETF.

Evaluate all of this to JEPQ’s equity-linked notes (ELNs) — a horrible income-generation technique that forces buyers to pay strange revenue tax on their distributions.

In contrast to QYLD, the NEOS Nasdaq-100 Excessive Revenue ETF (QQQI) would not promote name choices towards your complete worth of the fund’s portfolio — however as a substitute towards solely 75-90%. This implies the opposite 10-25% of the portfolio can transfer freely up and down with the markets and isn’t “capped” by the strike worth of the decision choice. Consequently, beneficial properties aren’t restricted to solely the premiums acquired from the bought calls — which is the unlucky actuality for QYLD buyers.

The result’s the value of QQQI strikes far more freely alongside QQQ when in comparison with QYLD.

For instance, through the weeks all through April 22 and July 18, 2024 shares of QQQ appreciated by +18.5%. Throughout the identical time frame, shares of QYLD appreciated solely 4.4%, whereas shares of QQQI appreciated +9.8%. That +5.4% outperformance from QQQI was catalyzed by their fund managers strategically writing name choices towards solely a portion of their fund’s notional worth as a substitute of the whole lot of its worth like QYLD.

To not point out, that +9.8% appreciation in share worth doesn’t embrace the $2.44 per share of revenue paid to QQQI buyers throughout that three month stretch (~5.0% yield).

How Has QQQI Carried out Throughout This Bull Market? 

QQQI was launched to buyers on January thirtieth, 2024. Shares of the fund started buying and selling at $50 per share. Now that we formally have a complete yr of efficiency to evaluation, let’s have a look at how QQQI did.

The 1-year complete return of QQQI was 22.7%.

All through these 12-months, QQQI paid their buyers $7.33 per share in complete distributions. Assuming you buy one share of QQQI for $50 on January thirtieth, 2024 — that is a 14.7% annual distribution yield.

All through the final 12-months, the share worth of QQQI appreciated by +8.3% — when mixed with their annual distribution yield brings us to having captured 95.8% of the Nasdaq-100’s complete return throughout the identical time frame.

I might argue QQQI has carried out fairly nicely throughout this bull market, capturing almost 96% of their benchmark index’s complete returns. Keep in mind, the target of this fund is to not out-perform its underlying benchmark index, however as a substitute generate excessive tax-efficient month-to-month revenue for his or her buyers.

And at a 14.7% annual distribution yield, I might argue they achieved that goal throughout their first yr of buying and selling.

How Will QQQI Carry out Throughout Volatility? 

Now let’s reply the million greenback query — how will QQQI and different coated name ETFs carry out throughout instances of volatility?

Nicely, let’s first outline what will trigger the volatility.

For JEPQ, their fund managers have the autonomy to purchase and promote particular names inside their ETF to doubtlessly offset market volatility. With that being mentioned, JEPQ started buying and selling on the open markets Might 4, 2022 at $50.10 per share. On October 13, 2022 shares of JEPQ fell as little as $39.61 — a dramatic -20.8% decline in share worth. With that being mentioned, all through that time frame they paid their buyers $2.06 per share in cumulative distributions — a 4.1% yield towards their open worth of $50.10 in Might.

From Might 4, 2022 to October 13, 2022 JEPQ buyers have been taking a look at a -20.8% decline in worth per share, which was greater than QQQ’s -20.3% decline in worth per share throughout the identical time frame.

Traditionally talking, JEPQ’s proprietary inventory selecting technique doesn’t offset worth volatility throughout bear markets. The one approach JEPQ was in a position to offset volatility was by producing month-to-month revenue for his or her buyers.

Contemplating QYLD’s fund managers don’t implement a proprietary inventory selecting technique and as a substitute simply maintain the constituents of the underlying index, theoretically talking the one approach QYLD may outperform QQQ throughout a bear market is by paying their buyers a month-to-month yield as the 2 funds’ holdings are precisely the identical.

Assuming that is true, then QQQI theoretically must also expertise the identical worth decline as QQQ throughout a bear market — with the one outperformance coming from their month-to-month revenue. And contemplating QQQI pays their buyers a 14.7% annual distribution yield (hyperlink) in comparison with QYLD’s 12.7% (hyperlink), that is a 2% distinction within the optimistic route for QQQI.

Now while you pair that 2% theoretical distinction with the outperformance QQQI has already demonstrated throughout rising markets (5.4% all through April-July 2024), QQQI has the chance to 1) materially outperform its rivals whereas 2) offsetting a possible decline in worth with its tax-efficient excessive month-to-month revenue if we expertise volatility in 2025.

Abstract

I can not predict what the Nasdaq-100 will do in 2025. There may be clear proof of the index being traditionally overvalued, however I am additionally a agency believer within the ideology that valuations can all the time be pushed larger by greed. Contemplating the dearth of volatility the index skilled in 2023 and 2024, I’ve cause to consider we’ll expertise a number of double-digit pullbacks within the Nasdaq-100 all year long.

Assuming that’s true, I consider holding shares of QQQI in my portfolio will likely be one of the best ways to play this looming volatility because the revenue generated by the shares will offset any worth declines skilled by the Nasdaq-100 whereas their data-driven coated name technique on solely a portion of the fund’s notional worth will enable for worth appreciation in rising markets as nicely.

Offsetting share worth decline with tax-efficient month-to-month revenue whereas collaborating in rising markets is a recipe for achievement in 2025.

Disclaimer: This isn’t monetary recommendation or suggestion for any funding. The content material is for informational functions solely, you shouldn’t construe any such info or different materials as authorized, tax, funding, monetary, or different recommendation. I/we now have a useful lengthy place within the shares of BTCI, SPYI, QQQI, and IWMI both by way of inventory possession, choices, or different derivatives. I wrote this text myself, and it expresses my very own opinions. I’m not receiving compensation for it. I’ve no enterprise relationship with any firm whose inventory is talked about on this article. Previous efficiency isn’t any assure of future outcomes. No suggestion or recommendation is being given as as to whether any funding is appropriate for a specific investor