Austin Hankwitz was a financial analyst at Medicis, a healthcare company, before he began creating personal finance content on social media platforms in 2020. To date, he has amassed over 700,000 followers on TikTok alone.
His short videos that break down investing concepts and share stock ideas that could make for good investment opportunities gained widespread attention from young retail investors during the pandemic lockdowns.
At the turn of the year, he decided to set a goal for himself and bring his followers along for the journey. It was to build an investment portfolio worth $2 million and to try and do it within eight years with the possibility that it could take him up to 15 years.
But meeting that timeframe would mean investing $10,000 to $15,000 a month, a steep commitment that would also require taking on higher risk and seeking quicker growth. His current stream of income comes from his creator business, which consists of newsletter subscribers, sponsored videos, consulting and his podcast. He estimates that his annual income for this year will reach $500,000.
He published his plan on December 23, 2022, on his Substack to put it into action in January. To date, he has $59,750 in a brokerage account and $72,774 in a retirement account, according to records viewed by Insider. Together, they have a total value of $132,524. There was $2,822 in the account before he started the challenge in January.
The options compound effect
One section of his portfolio is made up of dividend growth stocks such as Broadcom (AVGO), Lowe's (LOW), Visa (V), and MasterCard (MA). He believes these securities could accelerate his returns because they benefit from both share prices increasing and the dividends paid. He also employs the DRIP method, which stands for dividend reinvestment plan. Simply put, the payouts are reinvested to purchase more shares, creating a compounding effect.
As Hankwitz was looking for yields, he came across the NEOS S&P 500 High Income ETF (SPYI). Launched in August 2022, it has an annual distribution of 12.10% that's calculated by assuming the fund's most recent monthly distribution remains the same, multiplying it by 12, and then dividing it by the fund's net asset value. .
Not only did he think the yield was attractive, but the monthly frequency of the distributions allowed the fund to compound quicker, yielding a higher return over time. It's also attractive to those who may want to supplement their regular income, Hankwitz said.
It's not a traditional ETF that only holds a basket of stocks. Instead, it is long the entire S&P 500, or SPX, which allows it to track those equity returns while overlaying an options strategy that trades call options on the index. This means, for example, that the buyer pays a premium for the right to purchase SPX shares at a specific price known as the strike price, by a specific date known as the expiration. The income generated by premiums is paid to SPYI shareholders and could be used to purchase out-of-the-money calls. The options contracts run for six to seven weeks but get closed out after four weeks, allowing them to roll over every month.
"Normally, you'll see anywhere between 2 to 4% for most of these dividend stocks," Hankwitz said. "So when I saw 12%, my eyes were just wide open. I was like, oh my gosh, how are they doing this?"
According to Troy Cates, a portfolio manager for SPYI, the goal was to be able to issue a 10 to 12% payout yearly from the contract premiums and dividends from the underlying equities while providing enough appreciation within the portfolio. However, Cates emphasized that when the market is flat to down, this is not a hedge. In other words, the ETF is going to move down, but it will outperform the S&P 500 by the amount of premium it brings in on a monthly basis. In good months, it should be able to capture a lot of those gains and regain what it lost in the previous months, he added.
Aside from the high yield, Hankwitz likes that SPYI tracks the total return of the S&P 500, which contains the top US stocks. Comparable high-yielding, covered-call ETFs such as the JPMorgan Equity Premium Income ETF (JEPI), select their stocks. JEPI, which began trading in May of 2020, makes out-of-the-money S&P 500 Index call options and has had a 12-month rolling dividend yield of 11.04%. However, it's made up of 137 stocks that portfolio managers select. The upside is that it has a lower expense ratio of 0.35% relative to SPYI which is at 0.68%.
"Now, don't get me wrong, good for them. I hope the stocks outperform the market," Hankwitz said of JEPI's strategy. "But for a long-term investor like myself, I do want to have that deep exposure to the S&P 500. So that's why I really like SPYI: they hold all of the names inside the S&P 500, an index that we know is going to continue to appreciate over time."
Global X S&P 500 Covered Call ETF (XYLD) is a similar fund that holds the S&P 500 stocks. It has been around since 2013 and provides an 11.12% distribution yield. Its expense ratio is 0.60%. Hankwitz points out that XYLD writes at-the-money covered calls, meaning their strike prices are at or near market value. This caps their upside tremendously, he said.
Below is a graph that compares all three ETFs based on $10,000 invested since August 2022. Data was pulled from JP Morgan's investment comparison page.
The second reason Hankwitz likes SPYI is the tax implications. It's taxed as a capital gain since it's a distribution yield rather than a dividend. The ETF employs the Internal Revenue Service (IRS) Section 1256 rules, which tax the capital gains as 60% long-term and 40% as short-term investments. Ordinary dividends are taxed as income, meaning the amount owed would vary based on an investor's income bracket.
Hankwitz notes that this ETF hasn't been around for long and it's actively managed, so there is a lack of historical performance to review.
"The reason why I want to jump in on SPYI quickly, despite the lack of years of performance, is because I noticed with names like JEPI and XYLD and some of these others is that their underlying net asset value called the NAV seem to decrease over time, which as a dividend investor really upset me and not something I want in my portfolio," Hankwitz said. " And I realized the reason for that is because they write those at-the-money covered calls, which limit their upside, and as they pay out these distributions, take away from the net asset value of their funds."
Any investor considering a higher-yield product should understand that it's usually accompanied with higher risk, said Cates. While it pays out a yield that's similar to a fixed income product, it's not the same as a Treasury bill that doesn't have risk.
"We've talked to a lot of advisors that still use this type of product, whether it's ours or a competitor in some of their retirees' accounts," Cates said. "Because even at 65 or 70, people live a lot longer now. They want to make sure their money is still growing. And so they might look at it and say, 'I'm willing to take a certain amount of equity risk to get that 10 to 12% yield'."
