Recent data highlights the massive growth of the ETF market, with assets surpassing $8.1 trillion in the US alone. But when it comes to choosing the right ETF for your investment portfolio, there are a myriad of options to consider. The question remains: “What ETF to invest in?”.
Among the exciting new entrants in this space is the REX AI Equity Premium Income ETF (AIPI), which has been generating buzz for its substantial yield and innovative strategy.
If you’re wondering what ETF to invest in, let’s delve into why AIPI might just be a standout choice.
What is the AIPI ETF?
The REX AI Equity Premium Income ETF (AIPI) represents a fresh and unique approach to ETF investing. Listed on Nasdaq, AIPI blends a focus on AI technology stocks with a covered call strategy to boost income.
Here’s a detailed look at its strategy:
- AI-focused holdings: AIPI tracks the BITA Leaders Select Index, which encompasses U.S.-listed companies heavily involved in AI. This includes a broad spectrum of companies, from those specializing in AI hardware and software to those providing infrastructure and services essential to AI technologies.
The index distinguishes between “Pure Players,” firms with a high revenue exposure to AI, and “Key Enablers,” large, diversified firms facilitating AI development. - Index composition: The BITA Leaders Select Index is structured with a mix of Pure Players and Key Enablers. Pure Players are weighted based on their 12-month Average Daily Trading Volume, reflecting their trading activity and market liquidity. Key Enablers are given equal weight.
This results in a balanced index composition with Pure Players and Key Enablers comprising 40% and 60% of the index, respectively. This methodology aims to capture both high-growth AI stocks and established firms driving AI innovation.
Scott Acheychek, COO of REX Shares, emphasizes the potential of the AI sector and the role of AIPI in providing investors with income from high-growth technology stocks. This makes REX’s ETF a great candidate if you’re looking what ETF to invest in.
Acheychek notes, “The AI revolution is transforming every industry and presents vast investment potential. This strategy leverages the growth potential of key AI stocks and delivers monthly income from companies that typically do not pay dividends, potentially serving as a downside hedge during market dips.”
How does AIPI work?
To generate income, AIPI employs a covered call strategy. This involves selling call options on the stocks within its portfolio. The premiums received from these option sales are used to fund the ETF’s monthly distributions.
For instance, with Nvidia and AMD as major holdings, AIPI capitalizes on the high options activity around these tech giants to generate significant premiums.
Selling slightly out-of-the-money call options helps balance the ETF’s potential for capital appreciation with income generation. However, this approach means that AIPI may not fully benefit from significant upward movements in its stock holdings.
AIPI represents REX Shares’ second foray into the covered call ETF market. Following the October 2023 launch of the REX FANG & Equity Premium Innovation Index ETF (FEPI), which has accumulated over $225 million in assets under management, AIPI continues REX’s focus on innovative income-generating strategies.
AIPI’s enormous yield
AIPI has garnered attention for its impressive yield, particularly for such a new fund.
Though the ETF was only launched in June, its initial payout of $1.48 per share equates to a remarkable annualized yield of 35.1%, based on its current share price. This yield is calculated from recent distributions and may not be indicative of future payouts.
For context, other similar ETFs, such as the JPMorgan Equity Premium Income ETF (JEPI) and JPMorgan Nasdaq Equity Premium Income ETF (JEPQ), offer lower yields at 7.1% and 9.3%, respectively.
Even the REX FANG Innovation & Premium Income ETF (FEPI) shows a lower yield of 25.4%. AIPI’s higher yield makes it an attractive option for those focused on income.
What are AIPI’s holdings?
AIPI’s investment focus on AI stocks means its portfolio is comprised of both high-growth and established technology companies. The ETF holds 25 stocks, with its top 10 holdings accounting for 56% of its assets.
Key names include:
- Nvidia (NVDA): A leading player in AI hardware, known for its powerful graphics processing units (GPUs).
- Advanced Micro Devices (AMD): Another major player in semiconductors, crucial for AI computing.
- Broadcom (AVGO): A significant provider of semiconductor solutions.
- Apple (AAPL) and Microsoft (MSFT): Tech giants involved in various AI initiatives.
- Palantir (PLTR) and Super Micro Computer (SMCI): Companies providing critical infrastructure and services for AI technologies.
Does AIPI present any risks?
While AIPI offers an enticing yield, it’s important to be aware of the associated risks:
- Volatility: The technology sector, particularly AI stocks, can be highly volatile. The covered call strategy, while providing income, limits the ETF’s potential upside if stock prices rise significantly. This trade-off between income and capital appreciation is a key consideration.
- New fund dynamics: As a relatively new fund, AIPI’s long-term performance and effectiveness of its strategy are still evolving. The ETF’s ability to maintain its high yield and manage risks effectively over various market conditions remains to be seen.
- Expense ratio: AIPI has an expense ratio of 0.65%, which is relatively high compared to some other ETFs. While this is on the higher end, it is in line with the costs associated with actively managed funds and those employing specialized strategies like covered calls.
Should you invest in AIPI?
If you’re pondering what ETF to invest in, AIPI’s impressive yield and innovative strategy make it a notable option. Its focus on AI technology stocks combined with a covered call strategy offers a unique blend of high income and exposure to a cutting-edge sector.
However, investors should be mindful of the risks, including the potential trade-offs between income and capital appreciation, as well as the relatively high expense ratio.
Based on current evaluations, AIPI holds a Moderate Buy consensus rating on Wall Street. Analysts have assigned it 22 Buy ratings and 5 Holds, with an average price target suggesting a 15.3% upside potential.
AIPI could be a compelling choice for those looking to add high-yield, income-generating assets to their portfolios, especially if they are interested in the AI sector and can accommodate the associated risks. Nevertheless, potential investors should conduct their own research and consider how AIPI fits into their broader investment strategy.
Information in this post is for general informational purposes only. It cannot and should not be considered as suggestions or recommendations regarding investing or financial decisions.
