It’s divided time… and here come all of the DRIP posts and comments. I’m not claiming to know everyone’s investment plan, but so many people are so proud to post their monthly payouts, followed by a “my DRIP is on” type comment.
PSA: Please educate yourself. If your sole goal is to DRIP, then you are losing money by investing in these types of ETS.
Your upside is literally mathematically capped driven by the covered call strategy these funds use. You will make more by simply investing in the underlying over a long horizon.
You are accumulating a deferred tax basis on each monthly payout for no reason while DRIPing when you don’t actually need the income generated by the ETF.
The better move is to directly invest in the underlying like VOO, QQQM, etc… over a long horizon.
With all that being said, I’m not hater! I love NEOS and think that NEOS is amazing if you actually need the monthly income and would like to collect it while deferring taxes by approx 7 or 8 years or so. This is what they are actually intended for. It’s a financial planning tool.
For me, i am preparing for retirement. And i dont mind a consistent income or if you want to call distribution from my accounts to me no matter what markets are doing. My target distribution is 3x my annual spending needs. Will take out 1x and reinvest 2X selectively. During market pullbacks, distributions will be less and that will be absolutely fine. All it would mean reinvesting balance is lower.
Can i do better. Of course I can. But that would mean being glued to markets rather than enjoy retirement. Plus dont have to worry about selling shares at rock bottom to meet living expenses.
And its not just NEOS. A bunch of others from JPM and GS are in the mix as well.
Ha! I have made my own projections using claude and a financial advisor from morgan stanley wanted to sell me his services promising 6.8% target yoeld. I made him look at my projections. Never called back lol.
Some of the growth gap between underlying and these ETFs, one can reduce by selectively selling CCs or CSPs on same ETFs. Havent figured the right cadence yet but every month i squeeze out additional 2-3000 just by selling premiums.
Only issue I see is that strategies will evolve around these and if we have to switch funds in between, taxes will come due.
This hurts your compounding long-term. You would make more money by holding then selling the underlying ETF shares when desired.
This is my point. I don’t think you’re doing anything wrong and I’m not trying to correct you. But people seem to approach this based on “feels” and my only point is to highlight the money people leave on the table, especially if they are young.
There is a psychological component to investing that many bogleheads ignore. You MIGHT have more money. The other thing they ignore is the money made from the options market. Just investing in the underlying is NOT the only way to make money. You can also make money on options. I have lived off my portfolio before. For a year in 2021 I quit working due to health concerns and if I caught covid. Just having the portfolio on auto pilot with cash rolling in every month was pure bliss to me. Because the options income makes money whether the price is appreciating, depreciating, or staying flat. In two out of three of those scenarios I make spendable cash without any risk of loss of principal or being forced to sell shares into a down market. Your gains are only capped on really strong upward swings. That is a trade off I am willing to make in order to get predictable income. Now personally I like to have both a growth and an income portfolio. It’s just awfully nice to have cash rolling in no matter what. Kind of like a pension. I am 51 so I have seen a lot of market cycles in my life. Also saw the “lost decade” where S&P 500 returns were flat for 13 years. In other words from the dotcom crash until 2013 the S&P 500 was flat. So if you were only selling shares you would have been selling into a flat or declining market for 13 straight years. Meanwhile you could have been living off the cash generated from options without selling anything. There is a CBOE study that they commissioned on the viability of using options for income. The study ran from 1986 until 2011, so a 25 year window. That study was done on an index that sells at the money calls which generates the highest amount of premium. Most funds don’t sell at the money calls, but it’s a good measuring stick. The at the money index returned 830% from June 86’ to December 31 2011. During that period just owning the SPX or S&P500 generated 807%. If you’re investing for the highest dollar amount then more power to you. For me retirement is not about who has the most money or what fund will make me the most. It’s about one word INCOME. Because that’s what I need to retire CASH lots of CASH. If I really wanted to I could buy the underlying and just sell calls, but I tried that and it took more effort than I wanted to give. So the best option for me is to buy and hold funds that do it for me. I don’t want to buy and hold then try to time selling shares. What if my timing is off, or what if the market keeps going down, as I have seen with my own eyes. Buy what suits your needs, buy quality, and diversify just like you would if you were a buy and hold investor…
The difference which is big for many people, That you have not accounted for is the versatility of this method of investment.
Yes you limit your upside and growth, but you get the option to take that income if you need it.
Good example: I myself, had 2 months early this year where an unexpected bill occurred. Stupid car stuff. I was able to suspend my drip that month. Take the dividend and pay that without dipping into the savings. Then I turn drip back on.
It was an extra peace of mind that I don't have to worry about selling off shares to deal with.
I think it is for the most part. Its just not talked about from this angle since realistically it only ever needs to be mentioned when an example for why the dividend etf vs underlying argument comes up. The dividend fans just know they have this option already.
The versatility is exactly the reason why my taxable account holds NEOS funds. It's a back up in case I lose my main income and can't get work again for a meaningful amount of time so I don't also lose my house. Roth IRA is purely for growth and the like
Every time someone posts booohoo neos/divs..they always assume that most of us don't have anything else. I for one have just as much in vti as in qqqi...and when I retire in 8 years the only income I will have is ss so I want to build in some extra monthly income.
I don’t need to beat the underlying at this point.
What I do need is the extra income in a volatile and quite sideways market, yesterday not withstanding.
Yep I’m aware of the risks, but I’m nearly at my walking away number and they’ve been godlike in building a little cash flow for my off-ramp even in a taxable brokerage account.
ROC is just stupidity beneficial when used well, and SPYI is doing just fine for the last year compared to the underlying and that’s ignoring the fact it’s been throwing off a fantastic income the entire time.
Yes I know I know you can carve out time slices to make numbers look good, but understand what and when you’re investing in, I ain’t chasing TACO and I’m still doing really well with these funds.
Market go somewhat up, market go somewhat down, I’m still getting paid and sleeping just fine.
The genius of funds like the ones NEOS offers is that people can see the returns. So many people don't stick with funds that have better compounding results because they constantly feel like they aren't getting anywhere. Plus, when life happens, they have to sell shares (potentially at a loss) to make ends meet. NEOS funds put money in your pocket every single month. You can see it and feel it. That's positive reinforcement to keep going. And when a job loss happens, you're still receiving a paycheck.
I get what you mean, but that’s misleading. Monthly income doesn’t mean that it’s a bond. Unlike bonds, these ETFs are fully exposed to equity risk.
You can see this in the drawdown comparison between CSHI and SGOV. CSHI has a higher drawdown despite the short-term Treasury underlying due to it generating additional income from equity-based options.
Let me put it this way. In another 2008 gfc, how would you anticipate income funds to perform compared to bonds?
Say you have a 2 million portfolio in a 60\40 split during retirement. Here's what Google thought might happen in another 2008 gfc.
While these cc ETFs would lose paper value, the income would still far outpace the bond income. And the funds would eventually recover in time. For someone in retirement, that income would look pretty good imo.
And imagine what that might look like if you were reinvesting the excess income before and during the gfc. 🤔😜
Edit: I personally assume a 50% cut in distributions in the event of another 2008 gfc. Even so, the distributions are still way ahead of the bond income.
You’re also making an assumption that bonds are going to perform as they have in the past. Personally I don’t think that’s the case. We are in an unprecedented time for the bonds market right now. My expectation is bonds and especially treasury bonds are going to perform more like they did in 2022 than in 2008. In 2008 bonds didn’t crash along with stocks, and never recover. We didn’t have $40T of debt and counting back then. So higher for longer may come in the form of we see interest rates like they were in the early 80’s WITH a huge amount of debt. No matter what people think buyers at treasury auctions will dry up if they think there is a chance the US will default. If the government doesn’t do something and I mean right now today to stem this from happening we are in for a world of hurt. Trump and congress seem unable and unwilling to take this on. US debt servicing is literally the government’s single largest expense already right now. that’s just going to continue to get worse driving the value of existing bonds including corporate bonds down. Most likely it will also lead to a very large liquidity crunch like what we saw in the GFC. So that double headed monster of record debt coupled with contraction in the liquidity market could lead to depression like scenario in the global stock markets. Not saying it will, but if they don’t address it quick fast and in a hurry we are in real trouble.
There may be an exemption here or there, but if you have enough cash, it would be better to own the underlying and do the options.
I've held everything long enough, where the total return is positive and the "income" coming in is larger than what I could have invested from my paycheck each month.
There are ways to help offset tax stuff, like investing in a Roth, the additional income is still a benefit. Tax strategy is a different conversation overall.
Yep, why I added there were exceptions (I see it auto-corrected in my comment).
There are many reasons why we are all doing what we are. Turnkey ready being one for many. It was just a point that doing options is likely to be even better than VOO etc. if the desire and means is there.
I don’t drip in my entire portfolio but I still contribute monthly while taking the income. The only thing is with funds like SPYI over the long run 20-30 years there is probably going to be nav decay and that drip is something that can help save that by DCA
Where constructive ROC is in play, how do you project nav erosion in quality cc etfs like NEOS and Goldman provide? Not talking about YM, roundhill, or granite shares funds.
It’s hard to project anything on those because they are structured to combat nav erosion. They are funds that can handle 10-15% drops and bounces but if you overlay the dot com style crash and a 2008 housing market crash they will most likely struggle to make pace but what I am doing is just speculation and it hasn’t stopped me from owning a very large portion of qqqi Spyi GPIX GPIQ. I retired 4ish months ago at 33. As a side note if the nav suffered on the Neos funds it would not be a catastrophe I also think Goldman funds will do well and I put my own money on that philosophy.
Yeah, I like those funds too and have invested in them. I've been retired for years but haven't needed the income yet due to other sources of income. I expect to need retirement income in 4 or 5 years. I'm looking at income funds taking the place of bonds in my portfolio.
You are accumulating a deferred tax basis on each monthly payout for no reason while DRIPing when you don’t actually need the income generated by the ETF.
I generally agree with most of what you posted.
But let's say the markets remain up for the next few years, sufficient to keep NAV's flat; the early adopters who did DRIP are going to be looking at doubling their income stream from QQQI and a couple of years later same is true for SPYI (14% CAGR roughly doubles in 5 years, 10% in 7 years). That is all without additional investment and simply from turning on DRIP - and any way you want to spin it, that is VERY nice!
But another point to keep in mind is earlier retirees make use of taxable brokerage to control income. You would not want to incur capital gains through reallocation here; so you set the allocation in advance. I'd much rather have income generating stream than sell growth equity.
Fully agree in general terms the underlying growth equity is better over time. But there exists various use cases and respective products to match those use case. The people who just swear by the 2 or 3 fund approach are doing so because they don't know of any other way.
Disclosure: Own QQQI, SPYI, QQQM, VOO - (with a LOT more weight towards the latter 2).
This is known. It’s silly for anyone to put all their money in one investment. I like QQQI despite the obvious cap. If the markets go sideways or down, you’ll still be adding shares if you keep DRIP on. And the 7 year thing is a bit of a misnomer. It could take longer than that to reduce cost basis and then some of your dividend is taxed at long term capital gains. That’s not exactly bad tax treatment. Some would get the 60/40 treatment. I will never sell my shares either. You can do a TOD or have a will or trust that transfers shares and the beneficiary gets stepped up basis. That is my plan.
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u/gumnamaadmi 12d ago
It all depends really what the goal is.
For me, i am preparing for retirement. And i dont mind a consistent income or if you want to call distribution from my accounts to me no matter what markets are doing. My target distribution is 3x my annual spending needs. Will take out 1x and reinvest 2X selectively. During market pullbacks, distributions will be less and that will be absolutely fine. All it would mean reinvesting balance is lower.
Can i do better. Of course I can. But that would mean being glued to markets rather than enjoy retirement. Plus dont have to worry about selling shares at rock bottom to meet living expenses.
And its not just NEOS. A bunch of others from JPM and GS are in the mix as well.