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 whole returns — with the Nasdaq-100 delivering traders 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 very best 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 stated, I might argue valuations usually are not what finish secular bull markets. Throughout secular bull markets, valuations can at all times go larger — identical to throughout secular bear markets valuations can at all times go decrease as worry and greed transfer markets from one aspect to the opposite very similar to a pendulum.

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

With that being stated, 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 common -12-15% annual decline we have traditionally skilled throughout bull markets, in response to 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 fallacious.

What’s QQQI?

The NEOS Nasdaq-100 Excessive Revenue ETF (QQQI) is a lined name ETF that seeks to distribute excessive month-to-month revenue to their traders. 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.

Just a few issues set this fund aside from their friends like JEPQ and QYLD.

Not like JEPQ, the NEOS Nasdaq-100 Excessive Revenue ETF (QQQI) holds all 100 constituents of the Nasdaq-100 index. There is no “cherry choosing” of names their fund managers assume may be under-valued. As an alternative, QQQI traders 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 essential for 2 causes:

1. Index choices are categorized as Part 1256 contracts by the IRS. This implies regardless of the holding interval, all revenue generated from these contracts are taxed at 60% long-term capital positive aspects and 40% short-term capital positive aspects.
2. Moreover, the fund portfolio managers intention to reap losses inside the portfolio to both offset positive aspects within the choice contracts or fairness positions – which may permit fund distributions to be categorized as a “Return of Capital.”
   • Return of Capital distributions usually are not taxable within the yr they’re obtained, as an alternative traders would pay long-term capital positive aspects on their distributions if / once they ever resolve to promote their shares. That is particularly essential for traders seeking to decrease their annual tax burden as you’re basically changing short-term revenue distribution funds into long-term capital positive aspects remedy 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 traders to pay extraordinary revenue tax on their distributions.

Not like QYLD, the NEOS Nasdaq-100 Excessive Revenue ETF (QQQI) does not promote name choices in opposition to the whole worth of the fund’s portfolio — however as an alternative in opposition to 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 value of the decision choice. Because of this, positive aspects usually are not restricted to solely the premiums obtained from the offered calls — which is the unlucky actuality for QYLD traders.

The result’s the worth 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 period, 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 in opposition to solely a portion of their fund’s notional worth as an alternative of everything of its worth like QYLD.

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

How Has QQQI Carried out Throughout This Bull Market? 

QQQI was launched to traders 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 assessment, let’s have a look at how QQQI did.

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

All through these 12-months, QQQI paid their traders $7.33 per share in whole 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 value 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 whole return throughout the identical time period.

I might argue QQQI has carried out fairly properly throughout this bull market, capturing practically 96% of their benchmark index’s whole returns. Bear in mind, the target of this fund is to not out-perform its underlying benchmark index, however as an alternative generate excessive tax-efficient month-to-month revenue for his or her traders.

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 lined name ETFs carry out throughout instances of volatility?

Properly, let’s first outline what’s going to trigger the volatility.

For JEPQ, their fund managers have the autonomy to purchase and promote particular names within their ETF to probably offset market volatility. With that being stated, JEPQ started buying and selling on the open markets Could 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 value. With that being stated, all through that time period they paid their traders $2.06 per share in cumulative distributions — a 4.1% yield in opposition to their open value of $50.10 in Could.

From Could 4, 2022 to October 13, 2022 JEPQ traders had been a -20.8% decline in value per share, which was greater than QQQ’s -20.3% decline in value per share throughout the identical time period.

Traditionally talking, JEPQ’s proprietary inventory choosing technique doesn’t offset value volatility throughout bear markets. The one manner JEPQ was capable of offset volatility was by producing month-to-month revenue for his or her traders.

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

Assuming that is true, then QQQI theoretically also needs to expertise the identical value decline as QQQ throughout a bear market — with the one outperformance coming from their month-to-month revenue. And contemplating QQQI pays their traders 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 whenever 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 opponents whereas 2) offsetting a possible decline in value with its tax-efficient excessive month-to-month revenue if we expertise volatility in 2025.

Abstract

I can’t predict what the Nasdaq-100 will do in 2025. There’s clear proof of the index being traditionally overvalued, however I am additionally a agency believer within the ideology that valuations can at all times 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 probably be one of the simplest ways to play this looming volatility because the revenue generated by the shares will offset any value declines skilled by the Nasdaq-100 whereas their data-driven lined name technique on solely a portion of the fund’s notional worth will permit for value appreciation in rising markets as properly.

Offsetting share value 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 data or different materials as authorized, tax, funding, monetary, or different recommendation. I/we now have a helpful lengthy place within the shares of BTCI, SPYI, QQQI, and IWMI both via 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 is not any assure of future outcomes. No suggestion or recommendation is being given as as to whether any funding is appropriate for a selected investor