Forget JEPI: This 1 Covered Call ETF Yields Over 20% With Uncapped Gains

Investors have been piling into JPMorgan Equity Premium Income ETF (NYSEARCA:JEPI) in droves as it offers both a high yield and exposure to the S&P 500. But what if I told you there’s an ETF that yields twice as much and gets you uncapped gains? The Roundhill S&P 500 Target 20 Managed Distribution ETF (NYSEARCA:XPAY) does exactly that.

Of course, there are some pros and cons to discuss. No ETF will get you the best of both worlds, and that’s what we’ll be getting into in this article. XPAY is nonetheless worth researching since very few people know about it and are not taking advantage of it if they are in need of higher yields. If you allocate a small portion of your portfolio to XPAY, it can become a very lucrative income vehicle.

For example, let’s assume you have a $1 million portfolio. If you keep $800k in traditional ETFs and treasuries and keep $200k in XPAY, the 21% monthly yield will get you $42k per year or $3.5k per month on its own. I wouldn’t at all recommend putting more than 20% of your portfolio into this ETF, but this is one way to drive up your income significantly if need be.

How the Roundhill S&P 500 Target 20 Managed Distribution ETF works

XPAY’s looks counterintuitive on paper since it does not write covered calls as JEPI does. It instead buys deep in-the-money FLEX call options on the State Street SPDR S&P 500 ETF Trust (NYSEARCA:SPY | SPY Price Prediction). These calls are so far in the money that they move dollar-for-dollar with the S&P 500 and create a synthetic long position.

The fund then pays out monthly distributions at a targeted annualized rate of 20%, based on the fund’s NAV at the end of each December. These distributions are structured as return of capital (ROC), which is the key tax advantage. Unlike dividends or option premiums, ROC payments aren’t immediately taxable. They simply reduce your cost basis and defer taxes until you sell the shares.

In short, you’re sidestepping the capped upside trade-off that ETFs like JEPI have. XPAY’s composition means there’s no ceiling on your gains when the S&P 500 surges and the fund gets to participate fully in market rallies just as if you owned SPY directly.

The catch with XPAY

Obviously, if XPAY didn’t have a catch, half the market would already be owning it. The uncapped structure means you do not have any downside protection. If the S&P 500 were to decline by 30%, so would XPAY. Now, you might ask, “Where’s the catch?” since many covered call ETFs also have significant downside exposure.

The catch is that distributions continue regardless of performance, paid from fund assets. In sustained bear markets, you’re receiving your own capital back while your principal erodes. On the flip side, covered-call ETFs don’t do this, and their yields are more variable.

Who is XPAY for?

If you are a retiree who needs a high and reliable source of income, XPAY is worth buying. Even though the ETF will see NAV erosion, it’s not a bad thing if you don’t have several decades of retirement ahead of you. And if you’re not a retiree, putting some 5-10% of your portfolio in XPAY is a good way to augment your income while the going is good.

XPAY shareholders truly get the best of both worlds during sustained bull markets with steady, consistent gains. If the S&P 500 returns 15% in a year and XPAY distributes 20%, your NAV only declines by roughly 5% while you’ve pocketed that full 20% in tax-advantaged cash. In an even stronger market, you get both the yield and the upside. If the SPY surges by 25%, you will get a 5% upside.

XPAY has a 0.49% expense ratio and a 21.22% dividend yield at the moment. Dividends are paid monthly.