Buy, Sell, or Hold The NEOS Nasdaq 100 High Income ETF Right Now | QQQI

With the ceasefire with Iran supposedly going permanent, the market is facing a fork in the road. The NEOS Nasdaq 100 High-Income ETF (NASDAQ:QQQI) is rallying, up 3% so far today, but even bulls are not convinced this euphoria will continue for too long.

Obviously, a full reopening of the Strait of Hormuz and peace in the Middle East is good for the stock market. Unfortunately, peace in the Middle East rarely lasts, and the stock market could still tumble in the coming weeks even if the ceasefire sticks.

SpaceX (NASDAQ:SPCX) is another variable, with Anthropic and OpenAI likely to join in. All of this is either going to send the QQQI up towards the sky in a final euphoric rally, or the ongoing euphoria will fade with the ceasefire and prove to be short-lived.

Buying an income ETF built on the Nasdaq-100 could be a big mistake in this environment. These ETFs do exceedingly well during bull markets, but you’ll be in a lose-lose situation during a correction.

Let’s find out which is more likely and what steps you can take now.

The bears lost their Trump card

The ceasefire in the past three months did result in a relief rally, but not to a great extent due to the Strait of Hormuz remaining shut. If the Strait does reopen in earnest, I believe the market will also rally in tandem, as this will lead to an oil glut. In turn, this excess crude can translate into lower inflation, and eventually lower interest rates.

Higher Treasury yields and inflation were to blame for the mid-single-digit selloff earlier this month. If low oil prices do allow for interest rates to come down, this is going to alleviate a lot of the market’s fears.

The underlying economic momentum may have been too great for even a Strait of Hormuz closure to put an end to. Oil price increases were absorbed well, and futures remained near $80 even before the ceasefire. These aren’t crisis-level prices. And if the ceasefire holds, it only makes sense for the stock market to go up.

Still, if this rally heats up in the coming weeks, only for the conflict to restart again, it’s not going to be a pretty sight. You’re looking at the market pricing in the best-case scenario right now, and you don’t want to buy at the tippity top right before a major bearish event.

What this means for QQQI

QQQI employs a dynamic covered call overlay on the Nasdaq-100. It is great if you think negotiations are going to finally go through this time. You’ll get both the yield and participation in the Nasdaq-100’s uptrend.

However, QQQI will fail you if there is a repeat of the 2022 selloff. Remember, these covered call dividend ETFs have capped upside. When the S&P 500 falls by 10%, it can recover normally. When QQQI declines, it could take weeks or months to recover, especially if the market is choppy. You also don’t keep up with the market unless you reinvest all your dividends, and that beats the whole purpose of owning these covered call income ETFs.

Buy, hold, or sell QQQI?

QQQI is not something I’d want to hold, even if you are the perfect archetype for a covered call ETF. The only ETF of this type I’d hold is the JPMorgan Equity Premium Income ETF (NYSEARCA:JEPI) as it has more defensive characteristics and can survive a crash better. JEPI’s PE ratio is less than 25x, whereas QQQI’s PE ratio is approaching 36x.

I will admit that there is a 5% difference in dividend yields since the QQQI gets you a 13.18% yield with a 0.68% expense ratio. In comparison, the JEPI gets you 8.11%, with an expense ratio of 0.35%.

Even then, I’d forego that yield due to the risk baked into QQQI. These covered call ETFs are best-suited for retirees who don’t want to draw down their portfolio and want to partake in the rally. Buying QQQI will end up being a disaster within a few years for these investors once there’s a tech correction. Buy JEPI instead.