ETFs
Looking for a dividend yield of over 20%? Discover the FEPI ETF (NASDAQ: FEPI)
Even in a world where interest rates are higher than they were a few years ago, a yield above 20% still stands out, no matter what type of environment we find ourselves in, and that’s exactly what the REX FANG & Innovation Equity Premium Income ETF offers (NASDAQ:FEPI) offers to investors.
I’m bullish on this new, still-under-the-radar dividend ETF from REX Shares, due to its gargantuan yield, attractive monthly payout schedule, and portfolio of highly rated tech stocks.
What is the strategy of the FEPI ETF?
FEPI’s strategy involves owning large-cap technology stocks (the 15 stocks in the Solactive FANG Innovation Index) and writing covered calls against these securities to create increased income potential.
This is a strategy that has gained popularity in recent years because similar funds like the JPMorgan Equity Premium Income ETF (NYSEARCA: JEPI) and the JPMorgan Nasdaq Equity Premium Income ETF (NASDAQ:JEPQ) have become some of the most popular ETFs on the market.
Essentially, FEPI writes covered call options against its holdings and uses the option premiums it receives from the sale of these call options to pay its holders a monthly distribution. This can be an excellent strategy for generating stable, above-average income, as evidenced by the frequent payments and significant yield of the FEPI. These large caps technology stocks attract considerable investor interest and exhibit high volatility, so they are particularly well suited to generating attractive options premiums.
The downside of this strategy is that FEPI holders potentially sacrifice upside in capital appreciation, because if their holdings exceed the strike price of the call options they sell, FEPI holders miss out on this upside. additional.
For example, FEPI’s top stock is Nvidia (NASDAQ:NVDA). This is a theoretical example, but let’s say that FEPI sells a contract of June 21 Nvidia calls with $130 strike price for a premium of $120. In this hypothetical example, the fund benefits by receiving a premium of approximately $120 from the buyer of the put options of these calls, which it can distribute to its holders.
However, if Nvidia shares exceed $130 on the closing date, up to $150 for example, the fund is contractually obligated to sell those shares to the call buyer at the contract price of $130, meaning that he did not benefit from any appreciation of $20 per share beyond the exercise price.
However, if Nvidia shares remain below the strike price, fund managers can sell new calls against them and repeat the process to continually generate consistent income.
As long as investors understand these potential trade-offs and accept that they may miss out on a price rise from time to time, this can be an attractive and effective strategy for generating considerable income on a monthly basis.
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Massive Yield
It is important to note that the level of the FEPI monthly payment is not set in stone and the fund does not guarantee that it will make a monthly payment.
That being said, since its launch in October 2023, the fund has been remarkably consistent thus far, making a payout every month – the the smallest of these was $1.09 in April. We FEPI cover shortly after its launch last year, he wrote that it had the potential to generate large payouts, and that has largely come to fruition.
Many websites list the FEPI yield as 14.9%, which is still incredibly attractive, but that doesn’t tell the whole story. This is its return on a trailing 12-month basis, and the fund only launched late last year, so it has only made seven months of payments so far.
Looking at long-term performance paints a clearer, if imperfect, picture. Using the fund’s most recent payment of $1.16 in May as a monthly payment going forward, the fund has a massive distribution yield of 25.2%. Even if payments decline slightly from May’s level and fluctuate, this yield will still remain very high.
It is difficult to underestimate how outsized this return is. The S&P 500 (SPX) yields a measly 1.4%, while 10-year Treasuries yield a risk-free yield of 4.4%. Even FEPI’s aforementioned peers, like JEPI and JEPQ, report 7.7% And 9.8%respectively, eventually (using the same methodology as above).
Concentrated assets
FEPI owns 15 stocks and its top 10 holdings represent 67.8% of its portfolio. FEPI is not very diversified and is very concentrated, but diversification is not the objective of the fund.
Below you will find an overview of FEPI’s Top 10 Stocks using the TipRanks fund tool.
As you can see, FEPI’s portfolio consists largely of highly rated large-cap technology stocks that have driven the market higher in recent years, such as Nvidia and its fellow Seven Magnificent Stocks, the rest Micron chip manufacturers (NASDAQ:MU) and Broadcom (NASDAQ:AVGO), and a handful of other tech names.
These titles are highly rated by TipRanks’ proprietary Smart Score system. THE Smart score is a proprietary quantitative stock rating system created by TipRanks. It rates stocks from 1 to 10 based on eight key market factors. A score of 8 or higher equates to an Outperform rating. Eight of the top 10 FEPI stocks have smart scores equivalent to superior performance, and three, Broadcom, Amazon (NASDAQ:AMZN) and the alphabet (NASDAQ:GOOGL), present the “Perfect 10” smart scores.
FEPI displays an ETF Smart Score equivalent to an outperformance of 8.
How much does FEPI charge?
One of the downsides of FEPI is that its 0.65% expense ratio is quite expensive. An investor who invests $10,000 in the fund will pay $65 in fees per year. However, this is an actively managed fund with a fairly complex strategy, so the higher expense ratio isn’t necessarily surprising. If the fund can continue to make monthly payments to holders and maintain such a high yield, then few investors will complain about the expense ratio. However, if FEPI falters, more investors will begin to question its expense ratio.
Not without risks
As noted above, investors in the fund potentially give up some of the price appreciation in exchange for this significant return.
Beyond that, this is a relatively new fund and strategy, so it remains to be seen whether its strategy will pay off over time or whether it will be able to continue paying out as much money in the long term.
Finally, the fact that the fund is highly concentrated and heavily exposed to only one part of the market, large-cap technology, exposes investors to considerable risk if that segment of the market suffers.
Is FEPI Stock a Buy, According to Analysts?
Looking at Wall Street, FEPI earns a Moderate Buy consensus rating based on 13 Buy ratings, four Holds, and no Sell ratings assigned over the past three months. THE analyst’s average FEPI stock price target of $59.89 implies an upside potential of 8.7% from current levels.
The bottom line: A remarkable investment for income investors
Even in a world of higher yields, FEPI’s yield of over 20% stands out. I’m bullish on the ETF based on this massive yield and its monthly payout schedule, as well as its highly rated portfolio.
As long as investors understand and are comfortable with the fact that this significant return comes with a trade-off of potentially leaving some of the upside potential in capital appreciation on the table, then the FEPI can be a good option for generating monthly income. For this reason, I wouldn’t necessarily allocate my entire portfolio to FEPI, but I think it can be a useful tool for generating income within a diversified portfolio.