GPIQ: Goldman’s Monthly Dividend ETF with a Double-Digit Yield

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Dividend ETFs that sell call options to generate high yields and monthly payouts have become popular, and blue-chip asset manager Goldman Sachs (GS) has its own entrant into the space with its new Goldman Sachs Nasdaq 100 Core Premium Income ETF (GPIQ).

I’m bullish on this new entrant into the space based on its sizable, double-digit distribution yield (explained in detail below), appealing monthly payout schedule, and diversified portfolio of highly-rated large-cap technology stocks.

What Is the GPIQ ETF’s Strategy?

According to Goldman Sachs, GPIQ “seeks current income while maintaining prospects for capital appreciation.”

Like other popular monthly dividend ETFs, Goldman Sachs explains that GPIQ “aims to generate a consistent monthly distribution rate generally from options premium and equity dividends.”

GPIQ invests in the stocks in the Nasdaq 100 and generates a steady stream of monthly income for its holders through dividends from its holdings and income received for selling covered calls against these holdings. Goldman states that GPIQ will typically sell calls in an amount ranging between 25% and 75% of the value of the fund’s equity portfolio. The fund also has the ability to invest in and sell calls on other ETFs and over-the-counter (OTC) instruments.

How Does GPIQ Generate Income?

Let’s take a closer look at how this strategy works in practice. GPIQ sells covered calls on the stocks it holds and uses the income it receives from selling these call contracts to distribute income to its holders on a monthly basis. This is an effective strategy for generating a sizable amount of income.

The inherent tradeoff that investors need to be aware of here is that GPIQ likely sacrifices a degree of potential upside from capital appreciation. When its holdings rise above the strike price for the calls it is selling, it doesn’t participate in any of the gains above this strike price because it is obligated to sell its shares at the contracted price.

As Goldman itself explains in the fund’s summary prospectus, “In rising markets where the aggregate
appreciation of the underlying index over its exercise price exceeds the income from premiums, a portfolio with a call writing strategy could underperform the same portfolio without the options.”

Let’s look at an example using GPIQ’s top holding, Apple (AAPL). GPIQ hypothetically sells Apple calls set to expire in a month with a strike price of $250. The fund theoretically receives a premium of $500 from the buyer of the options for selling these calls. However, if the shares of Apple settle at $275 on the closing date, GPIQ is contractually obligated to sell these shares to the buyer of the call for the contracted price of $250, meaning that it isn’t entitled to any of the gains above $250.