Unconventional high yield ETFs dividend investors love

What if you made $40,000 a year and wanted to quit your job? You could save $1,000,000 and then withdraw 4% per year from your investments, to match your old salary. However, one million dollars is a lot of money for most people to save.

What if you could get an 11.91% return on your investment? Then you could get by with just $335,852 saved. That sounds a lot more attainable, doesn’t it?

Is it really possible? Let’s take a look at 3 unconventional ETFs that use options to increase yield:

  • QYLD with a yield of 11.91%
  • JEPI with a yield of 8.10%
  • NUSI with a yield of 7.80%

Symbol

Name

Yield

Expense Ratio

QYLD

Nasdaq 100 Covered Call ETF

11.91%

0.60%

JEPI

Equity Premium Income ETF

8.10%

0.35%

NUSI

Nationwide Risk Managed Income ETF

7.80%

0.68%

QYLD

QYLD is an ETF that makes its money via covered calls. It has high income, but that income is being traded at the expense of growth. QYLD is run by GlobalX.

What is a covered call

QYLD uses options to generate additional yield with a covered call strategy. For an example of this strategy, suppose you own 100 shares of a stock. You offer to sell those stocks to someone else via a covered call option, if the stock reaches a certain price. A couple outcomes can happen with a covered call:

  • Outcome 1: The stock does not reach that price, and you receive a premium for creating the option, and you don’t have to sell any shares. This premium helps QYLD generate extra income and helps offset losses if the stock price goes down.
  • Outcome 2: The stock goes above the agreed price, and you are forced to sell your shares. In this case, you receive profit on your shares, because the sell price set was above the share price. The person who bought the option will receive any additional profit beyond that price on the stock’s upside move. In this case, the covered call has limited the amount of upside potential you can receive from the stocks they were written against.

If your interested in learning more about what a covered call is then check out this article on covered calls.

Benefits of QYLD

  • QYLD has a yield of 11.91%
  • It outperforms when the market is moving sideways
  • Holding from strong growth companies in the NASDAQ 100

Downsides of QYLD

  • Underperforms during bull markets
  • The value of the QYLD ETF tends to trend downwards over time

If you compare QYLD to QQQ, which also tracks the NASDAQ 100, you can get an idea of how much upside potential is lost with QYLD. Even when QYLD’s dividend is reinvested, QQQ still has three times as much growth. If you are in the growth phase of investing, then QYLD may not be for you.

The option strategy used by QYLD helps limit the downside, but it also limits the upside more. As a result, QYLD has a downward trend over time and if you don’t invest some of the dividends back into buying more QYLD then you will see your total income decline over time.

QYLD declines over time

QYLD strategies

Due to it being a decaying asset, some people will use QYLD as a bridge. They might quit their job and start a business and use QYLD to fund them while they get the business off the ground. Another way of using QYLD would be to retire early and use QYLD as a bridge to buy more time for a growth stock to take off.

Some people use QYLD as a hedge against a sideways market. We have had a long term growth trend in the stock market, but it’s always possible to have a lost decade or more. Going by history, the NASDAQ rarely goes sideways, it’s almost always going up, with extreme crashes, so this may not be the best way to hedge against this scenario.

The biggest issue I see with QYLD is the lack of downside protection. It was around for the 2020 stock market crash, but that crash mostly spared the NASDAQ. If you look at the 2008 dot-com crash, the NASDAQ lost 75% of its value and took almost 15 years to recover. In this scenario, the impact to cashflow would be devastating. In addition to the loss of value, QYLD would also recover slower than QQQ.

qqq dot com crash recovery

To deal with a potential knockout blow of a major NASDAQ crash, I would pair QYLD with another non-correlated asset that is less likely to go down at the same time, or even might go up in the event of a crash. If QYLD crashed, then you would sell your non correlated asset to buy more QYLD to bring your cashflow back up to previous levels.

In the past, the ideal asset for this type of scenario would have been bonds. However, with zero percent interest rates, bonds are no longer a great hedge against a market crash. For the non correlated asset, I might do a form of an all-weather strategy, like the RPAR ETF, that would be more likely to handle a crash, but still have growth. Another popular pairing for QYLD is to add a growth dividend ETF, like SCHD.

JEPI

JEPI is an ETF that gives exposure to S&P 500 stocks. It makes money off the dividends from stocks in its portfolio and also off covered call income from equity-linked notes (ELNs). The fund is actively managed. JEPI is run by J.P. Morgan.

Benefits of JEPI

  • JEPI has a yield of 8.10%
  • It has the potential to appreciate over time, at a moderate level.

With QYLD, there was an issue where the underlying value of the asset was decaying over time. With JEPI it has had good growth, so it would be much easier to live off the yield, and still have the value of the investment grow over time.

JEPI Price growth over time

Downsides of JEPI

  • Lower upside potential
  • A newer ETF without as much of a history.
  • Little downside protection

Even if you reinvest the dividend back into JEPI, growth will still be lower than investing directly into the SP500

JEPI VS SPY price growth

JEPI does not have a long enough history to see what it would have done in a crash. Luckily, there is a nearly identical mutual fund, called JEPIX, that was around for the 2020 pandemic crash. During that crash, JEPIX lost 30% of its value, so it behaves very similar to the SPY in terms of downside.

JEPI strategies

JEPI is a great option for people who are interested in a high cash flow option. However, they do have to be prepared to lose up to 50% of their income during a market crash. JEPI will recover much faster than QYLD, but not as fast as the SPY.

NUSI

NUSI uses a collar option strategy on the NASDAQ 100. With this strategy, the gains and losses of the fund are capped at around 10% to 15% each month. NUSI is run by Nationwide Insurance.

Benefits of NUSI

  • NUSI has a yield of 7.80%
  • Potential for moderate upside appreciation
  • Downside protection

Unlike an ETF, like QYLD, that decays over time, the value of NUSI goes up. So you can get the best of both worlds, with capital appreciation and a high dividend yield.

NUSI has build in downside protection with a collared option. You can see that it worked very well in the 2020 stock market crash. QQQ was down close to 20% and during that time NUSI lost less than 10% of its value.

Downsides of NUSI

  • Lower upside growth potential
  • Downside protection may not work in a slow, multi month crash

NUSI has a lower upside growth potential due to the options limiting the upside. Even reinvesting dividends, QQQ outperformed NUSI with three times as much growth.

The downside protection that NUSI provides is great, but it is not foolproof. In a slow moving recession, where the crash did not occur in a single month, then NUSI’s downside protection will not work nearly as well. We had a crash like stock market downturn like this in the 2001 to 2003 period.

NUSI strategies

NUSI is a great option for people who are retired and want income, while having the value of their investment grow.

It’s also a great option for people who are closer to retirement and don’t want to take on the full risk of a market crash.

Lastly, it’s a good way to stay in the market when you feel that a crash is coming soon, but don’t know quite when and want to keep making money.

It’s not ideal for people who are still in the growth stage of investment and are able to quickly replace their investment capital with their current income.

Final thoughts

QYLD, JEPI and NUSI all provide high yield options, that will work for many scenarios. The high yield will come at the price of growth in all cases.