Is This 12.2% Yield ETF Too Good to Be True?

Looking for serious income from your portfolio? The ProShares NASDAQ-100 High Income ETF (IQQQ) might catch your eye. This covered call ETF is engineered to generate sizable payouts through the use of derivatives — and on the surface, its double-digit yield looks almost too good to pass up.

But before diving in, it’s important to look under the hood. IQQQ isn’t your typical dividend play, and while the income stream may be impressive, it comes with some noteworthy risks that investors can’t afford to ignore.

Key Points

• IQQQ yields 12.2% using covered call swaps, but payouts fluctuate and capital losses are possible.

• The ETF is concentrated in tech and has lagged the NASDAQ, with a slight price decline since launch.

• Strong income potential, but too volatile for retirees and not suited for long-term growth strategies.

How IQQQ Tries to Deliver High Income

IQQQ isn’t buying and selling options directly. Instead, it tracks the NASDAQ-100 Daily Covered Call Index by using swap agreements, specifically provided by Goldman Sachs, to simulate daily options activity.

So how does the income generation actually work? At the core is the covered call strategy: you hold a stock and sell call options against it. If the stock stays below the option’s strike price, you collect the premium and keep the shares. But if volatility spikes or prices drop sharply, the strategy can backfire, especially if the income generated isn’t enough to offset capital losses.

That’s the tightrope IQQQ walks: it converts the proceeds from these swaps into monthly income for investors. But this income-first approach means the fund’s performance is more about generating cash flow than growing the underlying value of its portfolio.

IQQQ’s Price Performance Has Lagged

Since its launch in March 2024, IQQQ’s price has actually slipped 1.3%, even as the broader market has had a volatile but upward trajectory. That number doesn’t account for the ETF’s monthly payouts, but the drop in principal value is still something long-term investors should consider.

Zooming out over the past year, IQQQ has posted a total return of 1.8%, trailing the NASDAQ-100’s 5.0% return in the same time frame. Sure, this ETF isn’t trying to match the NASDAQ’s growth; it’s playing a different game focused on income. But even within that framework, the lack of capital appreciation could turn off investors looking for total return over time.

Sector and Stock Concentration Are Key Risks

One of IQQQ’s biggest vulnerabilities is its heavy exposure to tech. Over 51% of the portfolio is invested in information technology, with no other sector topping 15%. That kind of imbalance worked beautifully when tech was booming — not so much when the tide turns.

On top of that, just three stocks make up over 23% of the portfolio:

• Apple: 8.6%

• Microsoft: 7.9%

• Amazon: 7.2%

That’s a lot of eggs in a very small number of baskets. If these mega-cap tech stocks stumble — or simply trade sideways — it can drag down the fund’s performance despite the high income it distributes.

What You Need to Know About That 12.2% Yield

Income is where IQQQ shines. Over the past 12 months, the ETF has delivered a 12.2% distribution rate, paid monthly. That’s far more than your average stock and even outpaces many high-yield REITs and energy pipeline firms.

But here’s the catch: payouts vary, a lot. For instance, in September, the fund paid $0.82 per share. But just two months later in November, the payout dropped to $0.10.

So while the average income may look attractive, the volatility in payments could be problematic for investors counting on a steady cash flow, such as retirees budgeting around expected monthly income.

What’s the Verdict, Is IQQQ a Buy?

If your top priority is long-term growth, IQQQ likely won’t fit the bill. The ETF is young, has a narrow strategy, and is overly concentrated in a few tech giants. That makes it less than ideal for investors seeking diversification and appreciation.

On the other hand, if you’re chasing monthly income, IQQQ does deliver — albeit with some fluctuations. But those variable payouts, combined with exposure to a risky options strategy, may make it a tough sell for conservative income investors.

For comparison, something like Realty Income (O) might offer a more predictable income stream. Its yield is lower at 5.4%, but its payments are steady and reliable, which many retirees value more than raw yield.

Bottom line? IQQQ is a high-risk, high-yield play. It might work in specific scenarios or as a small slice of a diversified income portfolio — but for most investors, especially those nearing retirement, the risks probably outweigh the rewards.