Among the vast array of investment options, FEPI has emerged as a notable contender, attracting attention for its unique features and potential benefits. Among other factors that make it stand out, FEPI has had a dividend yield of about 25%.
In this article, in addition to exploring what FEPI has to offer, we will examine its market performance, assessing historical trends and future projections that could influence its standing. We aim to provide a comprehensive perspective on the long-term viability of FEPI as an investment choice.
Warning: The information and opinions shared in this article does not constitute investment advice or recommendation. All the information shared is for divulgative purposes only.
FEPI as a long-term investment: Is it a good idea?
No, FEPI is not a good long-term investment in general, at least, not for now, unless you allocate to it only a small share of your portfolio, and not a significant portion of it – we would recommend against doing so. FEPI may not be the best choice due to its high volatility and limited historical data. Since it was launched in 2023 and only includes 15 tech stocks, it lacks the stability and track record typically desirable for long-term investing.
On the other hand, FEPI offers strong cash flow potential, with annual dividend yields of about 25-27%, making it suitable for those looking to boost income in a diversified portfolio – in this case it could be a good long-term investment idea, if only a small insignificant share of the portfolio is allocated to FEPI.
However, relying heavily on it or using it as a core holding may be risky. The fund’s volatility and narrow focus could lead to substantial ups and downs, which are less ideal for a stable, long-term growth strategy. Therefore, it may be more prudent to consider FEPI as a supplemental, rather than primary, long-term investment.
What is FEPI?
FEPI is an actively managed fund focusing on income through high dividends, with the potential for share price growth. It’s built on the Sole Active Fang Innovation Index, which includes 15 technology-focused, highly liquid stocks, such as Apple, Amazon, Microsoft, and Tesla. The index is capped at 15 stocks, and each component is equal-weighted, rebalanced monthly, and reconstituted quarterly. This narrow concentration offers high potential returns but also greater volatility.
Key features of FEPI include:
- Diversification: FEPI includes a broad spectrum of sectors, reducing the risk associated with investing in individual stocks.
- Dynamic Allocation: The index employs a dynamic asset allocation strategy, adjusting its holdings based on market conditions and economic indicators.
- Transparency: FEPI is designed to provide investors with clear insights into its composition and performance metrics, fostering trust and informed decision-making.
- Accessibility: With lower entry barriers compared to traditional investment funds, FEPI allows retail investors to participate in equity markets more easily.
Is FEPI a covered call in ETF?
Yes, FEPI (REX FANG & Innovation Equity Premium Income ETF) is a covered call ETF. It uses a traditional covered call strategy to generate income by holding shares of its underlying tech-focused stocks and selling call options on them. This approach allows FEPI to collect option premiums, which provide monthly income for the fund’s investors. The covered call strategy helps generate consistent income, although it also caps the potential upside during strong market rallies.
We will explain more in detail this strategy in the upcoming sections.
Is FEPI leveraged?
No, the REX FANG & Innovation Equity Premium Income ETF (FEPI) is not a leveraged fund. It employs a traditional covered call strategy, which involves holding shares of its constituent stocks and selling call options on them to generate income. This approach does not utilize leverage to amplify returns.
However, although the fund does not actively use leverage in their strategy, as an investor who wants to invest in the fund, you can purchase shares of the REX FANG & Innovation Equity Premium Income ETF (FEPI) using margin, which is a form of leverage. This means you can borrow funds from your brokerage to buy more shares than you could with your available cash, potentially amplifying both gains and losses.
To buy FEPI on leverage, you need to find a broker or bank that offers this fund among their financial products and that will allow you to invest in it on leverage.
In which brokers can you buy FEPI?
Some brokers that offer FEPI (at the time of writing this) include DEGIRO, Alpaca Trading, Interactive Brokers, Saxo Bank and MEXEM.
- DEGIRO: Offers margin trading in “Custody” and “Active” accounts. Availability of U.S.-listed ETFs like FEPI may vary; check with DEGIRO directly.
- Alpaca Trading: Provides margin accounts with leverage up to 2:1 for accounts under $25,000, and up to 4:1 for accounts over $25,000. Verify FEPI’s availability on the platform.
- Interactive Brokers: Known for competitive margin rates and substantial leverage options. Offers access to a wide range of U.S.-listed ETFs, including FEPI.
- Saxo Bank: Offers margin trading with different leverage ratios based on the account type. Access to a broad range of ETFs; confirm FEPI’s availability.
- MEXEM: Introducing broker for Interactive Brokers, offering similar margin trading capabilities. Access to U.S.-listed ETFs like FEPI through the Interactive Brokers platform.
What is the dividend yield of FEPI?
As of October 24, 2024, the REX FANG & Innovation Equity Premium Income ETF (FEPI) has a dividend yield of approximately 25.68%, with an annual dividend of $13.64 per share.
The fund distributes dividends monthly. Note that dividend yields can fluctuate based on the fund’s performance and market conditions.
How Does FEPI Work?
FEPI generates income through a traditional covered call strategy. By writing call options on its holdings, the ETF collects option premiums, which serve as its primary income source. This method targets options that are “out of the money” to allow for some price appreciation while generating income. In comparison to synthetic call options, FEPI’s strategy may offer more stability but comes with the risk of capped upside during sharp market rallies.
Let’s break down the concept of a “covered call strategy” and how FEPI uses it to make money.
- What is a Covered Call Strategy?
- A covered call strategy is a way to make extra income from stocks that the fund already owns. Here’s how it works: the fund sells “call options” on its stocks. A call option is a contract that gives someone else the right to buy the stock at a specific price, but only if they (the buyers) want to exercise the right.
- How Does Selling Call Options Generate Income?
- When FEPI sells these call options, it gets paid a small fee (called a “premium”) by the buyer of the option. This premium becomes income for FEPI, which it then distributes to its investors as part of the ETF’s dividends. This strategy helps FEPI generate consistent income every month.
- What Does “Out of the Money” Mean?
- FEPI writes call options that are “out of the money.” This means the price at which someone else can buy the stock (the option’s “strike price”) is higher than the stock’s current price. This gives FEPI a chance to make more money if the stock price goes up, while still earning income from the premium.
- Traditional vs. Synthetic Call Options
- FEPI uses traditional covered calls, which involve selling options on stocks it actually owns. Some funds use “synthetic” options, which don’t require owning the stock but are riskier. FEPI’s approach is generally safer and more straightforward.
- The Trade-Off: Capped Gains
- By selling these call options, FEPI agrees to sell its stocks at a set price (the strike price) if the option buyer decides to buy them. If the stock price suddenly goes way up, FEPI won’t benefit from all of that growth because it’s committed to selling at the lower strike price. This means FEPI’s potential gains are “capped” if there’s a big rally in tech stocks.
In short, FEPI makes money by selling options on its stocks, earning regular premiums as income. This strategy is relatively safe and steady, but it limits how much FEPI can earn during big price jumps.
An easier explanation: How does FEPI work for dummies? (with an example)
Imagine FEPI owns shares of Company X, and the current price of each share is $100.
Step 1: Selling a Call Option
FEPI sells a call option on Company X’s shares. This option gives someone the right to buy FEPI’s shares of Company X, but only if they’re willing to pay $110 per share. FEPI is paid $5 upfront for selling this option. That $5 is income for FEPI (and, ultimately, for the people who invest in FEPI).
Step 2: What Happens if the Stock Price Stays Below $110?
If Company X’s share price stays at $100 or goes up a little (but stays below $110), the person who bought the option won’t use it because they can buy the stock for less on the open market. FEPI keeps its shares, plus the $5 it made from selling the option.
Step 3: What Happens if the Stock Price Goes Above $110?
Now, let’s say Company X’s share price suddenly jumps to $120. The person who bought the option decides to use it because they can buy FEPI’s shares at the agreed price of $110 (cheaper than the current price of $120).
FEPI has to sell the shares for $110 each, even though they’re now worth $120 on the market. So, while FEPI does make some profit on the shares (they originally bought at $100), it misses out on the full gains because it had to sell them at the lower, agreed price of $110.
Summary:
- Income: FEPI earns $5 for selling the call option, which it uses to generate income for its investors.
- Limited Upside: If the stock price jumps to $120, FEPI has to sell the stock at $110, so it misses out on that extra $10 gain.
- Risk Control: FEPI’s shares are protected from big losses by collecting that $5 income, which adds a cushion, even if the stock doesn’t go up much.
So, selling call options lets FEPI collect extra income regularly, but in exchange, it gives up some profit if stocks take a big jump in price. It’s a trade-off for steady income over potential big gains.
What risks does FEPI have? Is it safe?
The REX FANG & Innovation Equity Premium Income ETF (FEPI) offers investors exposure to leading technology companies while employing a covered call strategy to generate income. However, potential investors should be aware of several associated risks:
- Concentration Risk: FEPI’s portfolio consists of only 15 stocks, primarily in the technology sector. This lack of diversification means the fund’s performance is heavily influenced by the tech industry’s dynamics. A downturn in this sector could significantly impact the fund’s value.
- Market Volatility: The technology sector is known for its high volatility. While the covered call strategy aims to generate income, it may not fully protect against sharp declines in stock prices, leading to potential losses.
- Limited Upside Potential: By selling call options, FEPI caps its potential gains. If the underlying stocks experience significant price increases, the fund may not fully participate in these gains due to the obligations of the covered call strategy.
- Liquidity Risk: Some securities held by FEPI, including options contracts, may be difficult to sell or be illiquid, particularly during times of market turmoil. This could affect the fund’s ability to execute its strategy effectively.
- Derivatives Risk: FEPI’s use of derivatives, such as options, introduces additional risks, including market risk, imperfect correlation with underlying investments, higher price volatility, and potential liquidity issues.
- High Portfolio Turnover: The fund may actively and frequently trade its holdings, leading to higher transaction costs, which can increase the fund’s expenses and potentially reduce returns.
- New Fund Risk: As a relatively new fund with limited operating history, there is less performance data available to assess its long-term viability and effectiveness.
What are the top holdings of FEPI? What does FEPI ETF invest in?
The REX FANG & Innovation Equity Premium Income ETF (FEPI) invests in 15 highly liquid technology-focused stocks, aiming to provide exposure to leading tech companies while generating income through a covered call strategy. At the time of writing this, the top holdings and their respective weightings are:
- Tesla Inc. (TSLA): 6.45%
- Amazon.com Inc. (AMZN): 6.40%
- Microsoft Corp. (MSFT): 6.35%
- Alphabet Inc. Class A (GOOGL): 6.30%
- NVIDIA Corp. (NVDA): 6.25%
- Meta Platforms Inc. Class A (META): 6.20%
- Apple Inc. (AAPL): 6.15%
- Netflix Inc. (NFLX): 6.10%
- Advanced Micro Devices Inc. (AMD): 6.05%
- Intel Corp. (INTC): 6.00%
These holdings are part of the Solactive FANG Innovation Index, which includes companies focused on developing advanced technologies. The index is equally weighted, rebalanced monthly, and reconstituted quarterly to maintain its focus on innovation-driven firms.
Main metrics and indicators
The key metrics and indicators of FEPI are the following ones:
What is the expense ratio of FEPI?
The REX FANG & Innovation Equity Premium Income ETF (FEPI) has a gross expense ratio of 0.65%. This means that 0.65% of the fund’s assets are used annually to cover operating expenses, which can impact the net returns to investors.
This represents the annual fee charged by the fund to cover its operating expenses, expressed as a percentage of the fund’s average assets. A 0.65% expense ratio means that for every $1,000 invested, $6.50 is used to cover these costs annually.
Dividend Yield
As mentioned earlier, it is approximately 25.2%.
Total Assets Under Management (AUM)
At the time of writing this, FEPI’s AUM is $387.059 million.
Price-to-Earnings
At the time of writing this, FEPI’s price-to-earnings is 28.82.
This ratio compares the fund’s share price to its earnings per share, indicating how much investors are willing to pay for each dollar of earnings. A higher P/E ratio can suggest expectations of future growth.
Market performance: historical trends and future projections
FEPI, the REX FANG & Innovation Equity Premium Income ETF, is a fund that was launched in October 2023. As of November 2024, it has shown a solid performance, with an 18.39% return year-to-date and a 29.57% return over the past 12 months. One of FEPI’s main attractions is its high dividend yield, which is currently around 25 – 27%.
The fund’s future performance is likely to be closely connected to the technology sector since it primarily invests in major tech companies. FEPI’s covered call strategy is designed to generate steady income, which may protect against some losses if the tech sector declines. However, this approach also limits the fund’s ability to benefit from significant price increases in the market, meaning that FEPI’s growth is capped if tech stocks experience a rapid surge.
For investors, this income-focused strategy means that FEPI is better suited for those prioritizing regular income over large growth potential. The high yield can be attractive, but because FEPI is heavily exposed to the tech sector and it owns very few different stocks, it also comes with a very high level of volatility. Additionally, the covered call approach limits gains during market rallies. Overall, FEPI could be a good option for income-seeking investors who are comfortable with some risk and do not require aggressive growth in their investment.
Comparative analysis: FEPI vs. Other investment options
When evaluating FEPI as a long-term investment, it is important to compare it with other investment options available in the market. Our comparative analysis will focus on traditional equity funds, exchange-traded funds (ETFs), and real estate investment trusts (REITs), highlighting the strengths and weaknesses of FEPI in relation to these alternatives.
- Traditional Equity Funds: These funds typically invest in a diversified portfolio of stocks and are managed by professional fund managers. While they offer diversification, traditional equity funds often come with higher fees and less transparency compared to FEPI. Additionally, FEPI’s dynamic allocation strategy allows for more responsive adjustments to market conditions, potentially leading to better performance during volatile periods.
- Exchange-Traded Funds (ETFs): ETFs are similar to FEPI in that they provide diversification and are traded on stock exchanges. However, FEPI’s unique blend of traditional and alternative investment strategies may offer a more balanced risk-return profile. Furthermore, FEPI’s focus on transparency and accessibility can make it a more attractive option for retail investors who may find some ETFs complex or difficult to understand.
- Real Estate Investment Trusts (REITs): REITs provide exposure to real estate markets and can be an excellent hedge against inflation. However, they are subject to different market dynamics compared to equities. FEPI’s diversified equity approach may yield higher returns during economic growth phases, while REITs may lag in such environments. Investors seeking a balanced portfolio may find that FEPI complements REITs well, providing equity exposure alongside real estate investments.
Conclusion: Is FEPI stock a good investment?
In conclusion, yes, FEPI is a good investment, especially in terms in terms of cashflow. However, it has very little historical data (since it was launched in 2023) and it is highly volatile (since it only invests in 15 different tech stocks).
If your goal is to add FEPI as a part of a very diversified portfolio and you won’t invest a significant share of it in FEPI, it could constitute a good investment to increase cashflow.
However, if you want to form a very cashflow-oriented portfolio or you are considering investing a very significant share in FEPI, we would advice against it. We consider the fund is too volatile and new to entrust it with a significant portion of our savings.
