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Neos covered call ETFs became really popular lately and I would like to discuss which ones should be preferred for income investors.
First, all these ETFs have 3 sources of income/yield/growth:
1. Covered call writing premium, or other niche option trading income.
2. Organic yield through underlying investments (dividend, rental, royalties, etc.)
3. Capital appreciation (mostly capped)
It seems that Neos might be targeting a certain yield for these ETFs, mostly around 11-13%, with exception of cryptos and slightly above the range for QQQI/IWMI, thanks to higher volatility.
It should be noted that more volatile assets (SPYI, QQQI) will generate more income from Category 1, but they yield less from Category 2 (<1% SEC yield). On the contrary, less volatile ones (IYRI, and potentially MLPI) will have less income from Category 1, but more yield from Category 2 (3-6%). I believe when combining 1 and 2, it is quite balanced at the end, so their payout is similar enough.
Regarding Category 3, it should be easy to see SPYI/QQQI have more upside than IYRI/MLPI, despite being mostly capped every month. As compensation, IYRI/MLPI should have more downside protection due to organic yield from Category 2, although it is far from guarantee. For example, if NAV were cut in half, option premium income would go down accordingly, but rental income would stay relatively stable, or slightly down due to vacancy/default, so 3-6% organic yield might become 6-10%, continue to provide income stream. Dividend yield from SPYI would go up as well, but only from 1% to 2%, and it is not going to fully compensate the loss of income from Category 1 in this hypothetical scenario.
So, for SPYI/QQQI/IWMI, the 3 category split would be roughly 70/10/20, while for IYRI/MLPI, the 3 category split is more like 50/40/10. These splits are my rough estimates. Due to organic yield, if one prioritizes income protection, they should choose IYRI/MLPI, and if one prefers to keep more upside and worry less about potential income dips, SPYI/QQQI should be the preferred options.
Did I get everything right?