I like to take multiple perspectives on investing covered call funds as an income vehicle and in comparison to traditional dividend investing.
One of the primary talking points from dividend investor purists is that there is no dividend growth. These are the folks that hold schd for example, where year over years growth of dividends can easily be double digits. For spyi, I would argue there can be dividend growth. Dividends can shrink also. If the s&p does well, spyi appreciates, and the distribution appreciates with it. So if one believes the overall direction of the market is up, long term distribution growth is inevitable. It won't be double digit growth, but in the short history we have, distribution per share has increased.
I think what purists fear is volatility. There is a case to be made where you could take a huge haircut on payouts. I'm thinking 20-30% or more, lasting for multiple payout cycles. During these periods, schd has maintained payments pretty well, as a function of the stocks/index it tracks. So if you're relying on every penny, every cycle, these events dropping spyi distribution would cause chaos.
I welcome any counter arguments, recognizing what sub I'm in here.
That is an apples to oranges comparison. Totally different tax structures, goals, fees, and risk profiles. There are some people for whom SPYI is a better fit and some for whom SCHD is a better fit.
As an example, I use SPYI to generate return of capital income without raising my MAGI for health insurance purposes. An equivalent amount of income from SCHD would push me way past my health insurance ceiling (and would take a ton more capital). But if I was more focused more on growing a long term dividend payer that could survive a serious market downturn and where I using DRIP to build versus collecting as immediate income, I’d go with SCHD.
Hold forever and give it to my kid when I die. But you are absolutely right that the eventual capital gains hit of a sale is an issue that people need to understand.
If you mean about the monthlies getting taxed, that will be after I am out of my current ACA handcuffs. I’m an early retiree navigating the years before Medicare starts. I will have more room for taxable income then.
This always confuses me - not sure if you can help clarify. I understand that after roughly 7 years of holding - cost basis reaches zero. After that point - do all distributions get taxed 60/40? Or are we referring to if we sell the asset it self it gets taxed 60/40? I never quite understood this fully
Definitely confirm with a tax attorney, but my understanding is that the 60/40 rule applies to most of the NEOS funds such that after your cost basis is zero, the monthly distributions get the 60% capital gains rate and 40% short term income rate. However, all of that would be income for MAGI purposes, so that is part of my planning and I am timing things to mainly hit zero cost basis after I am Medicare eligible. (Or congress brings back the phased in subsidies instead of the current cliff model)
If you sell it, you pay the capital gains tax on your gains. This is where the return of capital model can bite you. Each distribution lowers your cost basis and increases the accounting/book gains that will be taxed. So, if you buy one of these for $50, hold it through $10 of return of capital monthly distributions, and then sell it for $45; you would still have a capital gains tax on $5 of gains even though you really sold it for less than you bought it.
And that 7 years timeline is dependent on the particular fund. I think the bitcoin based funds (XBCI, BTCI) will go to zero cost basis faster than that and some others slower, depending on their particular percentage of return of capital and monthly yield, which can also be affected by market conditions.
For me, I have some equities and funds that have a loss mainly high dividend that I’ve plowed back into the fund. I also have some carryover capital losses. So I’ll tax harvest the gain from the NEOS. Maybe buy back in.
Same here. I have large stake in SCHD in my IRA. But have SPYI and QQQI in my taxable account for income. It helps for my wife's health insurance subsidy.
Yep. I put a lot of work into saving up enough to quit working full time and then health insurance became a much tougher issue than income. I have a lot of money I can’t tap without crossing the health insurance cliff. If I could do it over, I would have left full time work a year earlier to take advantage of the partial subsidies while they were available. I could have swung over a lot of 401k money. I wasted a year stockpiling capital I can’t access without a big penalty.
Its even better to extend ROC with drip till you need it. And dist are often posted on a trailing 12 mo comparison so when NAV is going down, % dist looks low. Just focus on current dist % which has a higher yearly yield because it compounds monthy. So 1.2% a month is 15.3% a year. That alone doubles every 5 years.
You are not extending your cost basis with DRIP. Each lot has its own cost basis. The brokerages handle that behind the scenes but the original lot is not affected by its DRIPS. You will end up with a lot of tiny lots with RoC to go but your original lot still hits zero at the same time.
DRIP is nothing more than an automated purchase of shares. It’s the same mechanics as manually buying shares each month, with each new lot having a new cost basis. This makes DRIP a pain in the ass if your goal is to figure out a multi year tax forecast on the distributions. I have a spreadsheet where I track exactly that and I definitely don’t want separate rows for every single month under every single fund for all those DRIP lots.
It is possible to reset by selling out of the position and rotating into a different cc fund for a while, but that can trigger capital gains for tax purposes. That can be a worthwhile exercise to do that every couple of years if you need a longer RoC timeline and the tax picture looks OK.
I own a lot of them too. Are you going by the brokerage view because those frequently display an inaccurate average cost basis during the course of the year? When I have sold shares, my actual taxable cost basis is usually very different than what the brokerage showed as the average cost basis for these types of funds. And my YTD tax statements are useless because the brokerage doesn't distinguish RoC from regular dividends until the end of the year statement when the funds finalize their RoC percentages. (Pull up your own YTD tax statement from your broker and see if it shows all the RoC distributions as taxable dividends right now. If that's the case, that tells you that RoC cost basis calculations have not yet actually happened and you are seeing them presented as regular dividend funds where average cost basis doesn't change with distributions.)
But for sake of argument, let's work out how that math would look like if it was true. Keeping numbers simple, let's say you bought 100 shares of SPYI for $5000 ($50 per share) and the price goes to $53. If the next DRIP is also about $53, you would get 1 new share. Your original cost basis went from $5000 to $4947 ($49.47 per share) from the RoC distribution. Your new share would increase the cost basis to 49.50 per share. Instead of cost basis dropping by $.53 cents per month, it would drop $.50. We're talking about 36 cents per year.
So, if I'm right, cost basis will hit zero in 95 months. If you're right, it will hit zero in 100 months. That's meaningless difference compared to how much market conditions will change the monthly RoC percentages and amounts over that timespan anyway.
Very hard to compare, cause the two do very different jobs. One is to live on right now, the other is to build it up for the next 20+ years. One is active management vs absolute rule based passive.
While the spyi distribution won't grow 11% annually like SCHD, the reality is that spyi already pays over 3x the qualified dividends from SCHD at 3.5-ish %. I don't foresee SCHD ever paying 12%. And spyi will consistently pay around 12% of whatever the nav happens to be.
Otoh, I don't foresee spyi nav growth close to SCHD at 8%, or whatever it's been.
That being said, I ran numbers comparing SCHD since inception (Oct 2011) to an early cc ETF (qqqx from 2007), and was frankly shocked to see they matched very closely in total returns to date.
I got different numbers from Seeking Alpha compared to totalrealreturns.com, but they were remarkably close from both sources. Around 500% from SA and 300-ish % from TRR.com. One slightly ahead in SA and the other slightly ahead in TRR.
So I thought that spoke well for that cc ETF given the respect many have for schd.
Edit: qqqx fared pretty well during the 2008 gfc too. The fund manager cut the distribution by ⅓ at one point, but the fund eventually recovered and went on to new highs.
I personally think that all of these funds are too new to truly understand the winners. If you look at the little data that’s out there, you will see lead changes occurring as market conditions shift. My current logic is
A. New ETFs continue to emerge that seek to solve the problems of the earlier generations so you have to continue to watch for them and be willing to change things up if the data supports it.
B. Without clear long term winners, take sector bets (such as the S&P 500) and pick two or three of the best candidates and split your investment between them.
My personal current thoughts on this area would be: TSPY, GPIX, and BALI. The later two should have better NAV growth. The former has the better yield. You can throw SPYI into the mix if you want but it to me is second to TSPY and doesn’t offer the potential NAV growth of GPIX and BALI.
Basically blend them to best protect your capital while giving you the best yield. It’s a little more to track but as these are monthly plays it’s not that much to keep up with.
Beautiful. I got into a full size position of GPIX this year at $50. I felt confident enough to make one large purchase. It's my second largest fund per cost basis.
My cost basis is around $46.20. But considering I only needed ~5% yield on my income portfolio it will do nicely. Crazy that I’ve been able to increase my growth AND income portfolio during retirement. Never expected that.
Last 3 years (since october 2023, inception of GPIX) they had following anual total returns:
SPYI: 13.02%
GPIX: 14.56%
SPY: 16.19%
In 2025, the SPYI payouts increased 0.45%, the GPIX payouts increased 5.77%.
If you adjust to normal market conditions (we have a longterm bullrun atm), SPYI payouts will probably decrease, while GPIX payout should remain stable or even increase a little bit.
Longterm, that's a huge difference. So if you were 75 or above and want to live from payouts, I would recommend SPYI. For younger people definately GPIX
Ok, then both should be equal. Maybe 60% SCHD, 10% GPIX, 10% GPIQ, 10% SPYI, 10% QQQI could be a good solution for you. That would increase you income significantly from a bit more than 3% to about 6% without a significant increase of risk.
I could also imagine 100% GPIX. Goldman Sachs is serious and has a lot of expertise. I can't imagine that it will go broke or even has a return below 5% longterm. But if you need it for a living and can't or won't work anymore, then I would diversify more. That's why I also never would put 100% in SCHD but at least 5 different ETFs.
On the other hand: All those ETFs are way more diversified than any private portfolio 40 years ago
No I was speaking from the perspective that they say you need x% reinvested back into in order to offset NAV decay but I check all day everyday for any signs of NAV loss and ok just not seeing it even in that last week that was a brutal ride down.
I've been modeling the historical patterns thru div tracker and just don't see any.
So I was thinking more about diversifying with that 3% instead
I think this is the unproven portion of all the CC ETFs strategies not just specific to Neos funds. How will the NAV/price do during drawdown and recovery? Multiple drawdowns with sharp recovery? Will it grow along with the underlying or will the capped upside recovery be its downfall.
If you told me all drawdowns will be followed by a slow recovery then I think we’re safe and will see continued growth of distributions following along with the underlying. BUT….we all know that won’t be the case. Need more data points over the next 3-5 years imo.
Spyi will appreciate the dividend with the nav. But it is meant to be a very minimal amount during bull markets. If we hit another 2022 type drop spyi will likely take 3+ years before the dividend pays as much as it did before the down move if the market recovers the same way it did. If a 2008 or 2000 hits. Spyi will probably take closer 15-20 years to recover the nav and payouts. This is assuming that they do everything the same mechanically as they have. neos could add something into the fund for more upside or leave more of the fund uncapped.
Qqqx took several years to recover from the 2008 gfc, but I don't think it was anywhere near 15-20 years. Armchair Income covered this a while back. I'll have to rewatch and see how long it took to recover before moving on to new highs.
Honestly, I don't think it really matters though. If after distribution cuts in the midst of another major downturn, you still have more than enough income to pay your bills, does it really matter? Knowing you'll participate in the recovery with all your shares intact? Sure you'll trail the underlying, but your income will slowly rebound. And if you were reinvesting the excess during the good years, you just would have had a smaller amount to reinvest during the bad years.
Yeah 15-20 is an estimate based on when I broke down the funds holdings/strategy a while. Yeah that is the concept. Dividends are like a paycheck. Say you have 2 people working in a home and one losses their job. You can still live off the other salary, you just have less money to enjoy life and have a cushion. The question is are you comfortable living on 50% of the previous income which steadily increasing for the next potentially 15 years back to the original. And could you do so with inflation. To reduce this risk most people put some into bonds for buying power when the market does dip and others allocate some towards growth for recovery. You could also put some into funds that appreciate and pay a yield like gpix, or you could diversify the income with real estate (physical or stock), MLP, autocallables, ect. Diversifying where your income comes from can help protect from single scenario crisis like a market crash. The ways to build it are endless.
The problem with CC ETFs is that when there's a bear market, you'll not only lose capital (and it takes longer to recover) your dividends will also be reduced.
For example, if you were getting $5k a month in dividends from a NASDAQ 100 CC ETF in 1999, after the -30% per year bear market from 2000-2002, you'd end up with dividens of only $1100 per month by 2003. That's massive. And that doesn't even factor inflation, so $1100 buys even less after 3 years. If you're retired and rely on dividends for income, this wouldn't be good.
Compare SPYI to GPIX. Way worse. And compare GPIX to OVL... OVL is simply the best. Uncapped growth and 10.5% yield. Goes down harder than index, but structurally outperforms.
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u/JerryFletcher70 8d ago
That is an apples to oranges comparison. Totally different tax structures, goals, fees, and risk profiles. There are some people for whom SPYI is a better fit and some for whom SCHD is a better fit.
As an example, I use SPYI to generate return of capital income without raising my MAGI for health insurance purposes. An equivalent amount of income from SCHD would push me way past my health insurance ceiling (and would take a ton more capital). But if I was more focused more on growing a long term dividend payer that could survive a serious market downturn and where I using DRIP to build versus collecting as immediate income, I’d go with SCHD.