Dividend Dynamo Part 3: Harvesting S&P 500 Volatility for Income

Building Income Through Options-Based Strategies

Welcome back to our Dividend Dynamo portfolio construction series. After establishing our foundation with PFFA (Virtus InfraCap U.S. Preferred Stock ETF) and PBDC (Putnam BDC Income ETF), we're now adding our third component: S&P 500 covered call exposure through a strategic combination of Goldman Sachs S&P 500 Core Premium Income ETF (GPIX) and NEOS S&P 500 High Income ETF (SPYI).

This addition introduces a sophisticated income-generating strategy that transforms market volatility into consistent monthly distributions while maintaining broad market exposure. Unlike complex structured products or riskier alternatives, both funds utilize straightforward exchange-traded options to enhance yields, making them ideal for regular investors seeking professional-grade income strategies.

Why Covered Call ETFs in Dividend Dynamo?

Covered call strategies serve multiple purposes in our income-focused portfolio:

• Income Enhancement: Both funds generate yields significantly above traditional S&P 500 dividend yields—GPIX targeting approximately 8.5% and SPYI aiming for 10-12% annually.

• Volatility Harvesting: These strategies convert market uncertainty into income streams, performing particularly well during sideways or moderately volatile markets.

• Partial Downside Protection: The premiums collected from selling call options provide a cushion during market declines, though this protection is limited.

• Diversification: Unlike our preferred stock (PFFA) and BDC (PBDC) holdings, these funds offer large-cap equity exposure with enhanced income characteristics.

Fund Analysis: GPIX vs SPYI

Goldman Sachs S&P 500 Core Premium Income ETF (GPIX)

Launch Date: October 24, 2023
Expense Ratio: 0.29%
Target Distribution: ~8.5% annually
Assets Under Management: ~$787 million

GPIX employs a dynamic covered call strategy, adjusting option coverage between 25% and 75% of portfolio value based on market conditions. Currently, approximately 36% of the portfolio is covered by options, leaving substantial upside potential during bull markets.

Key Advantages:

• Lower expense ratio provides cost efficiency

• A flexible options strategy adapts to market conditions

• Strong risk-adjusted performance with comparable Sharpe ratio to SPYI (0.72)

• Better total return potential in rising markets due to a dynamic approach

Recent Performance: GPIX achieved 0.81% year-to-date returns through June 2025, demonstrating resilience during market volatility.

NEOS S&P 500 High Income ETF (SPYI)

Launch Date: August 30, 2022
Expense Ratio: 0.68%
Target Distribution: 10-12% annually
Assets Under Management: ~$3.02 billion

SPYI pursues a more aggressive income approach, typically covering 76% of its portfolio with options to achieve higher distribution targets. The fund also implements tax-loss harvesting strategies to enhance after-tax returns.

Key Advantages:

• Higher distribution yield appeals to income-focused investors

• Superior year-to-date performance at 1.48%

• A longer track record provides more performance history

• Tax-efficient distributions with significant return of capital components

Tax Benefits: Between 51% and 93% of SPYI's distributions have been classified as a return of capital, providing tax-deferral advantages for taxable account holders.

Strategic Allocation Rationale

Rather than choosing between these funds, we believe it is best for our portfolio to benefit from holding both in a 60/40 allocation, favoring GPIX:

60% GPIX Allocation

• Provides foundation exposure with better long-term total return potential

• Lower fees enhance net returns over time

• Dynamic strategy offers more flexibility during varying market conditions

• GPIX has outperformed SPYI in bull market conditions because of less aggressive options selling

  • This gives a boost to long-term total returns.

40% SPYI Allocation

• Delivers higher current income for immediate cash flow needs

• SPYI's higher dividend rate from selling more at-the-money options makes it more suitable for sideways or bear markets

• Provides tax advantages through the return of capital (ROC) distributions

• Offers portfolio stability during volatile periods

Risk Considerations and Management

Upside Limitation

Both funds cap participation in substantial market advances. Research shows covered call strategies captured only 65% of market gains during rallies over the previous decade. However, our dual-fund approach mitigates this by providing GPIX with more flexible coverage.

Market Dependency

These strategies perform best in sideways or moderately rising markets. During sustained bull runs, traditional index funds typically outperform. Despite sharp declines, covered call funds still experienced 84% of the market losses while missing out on the upside.

Expense Considerations

Both types of ETFs charge fees that are higher than average, but our selection focuses on cost-efficient options within the category. GPIX's 0.29% fee is exceptionally competitive.

Why Not JEPI or JEPY?

Our analysis deliberately excludes JPMorgan's JEPI and JEPY funds despite their popularity. These funds use equity-linked notes (ELNs), which introduce counterparty risk and result in ordinary income tax treatment rather than the more favorable tax characteristics of traditional options. For regular investors, the pure options-based approaches of GPIX and SPYI provide cleaner exposure without unnecessary structural complexity.

Portfolio Integration Strategy

Within Dividend Dynamo's structure, our GPIX/SPYI combination serves as the growth-oriented income component:

1. PFFA (Preferred Stocks): Provides stable, high-grade income with interest rate sensitivity

2. PBDC (Business Development Companies): Delivers floating-rate exposure and credit premium

3. GPIX/SPYI (Covered Calls): Adds equity upside potential with enhanced income generation

This three-pillar approach creates a diversified income stream less dependent on any single strategy or market segment.

Implementation Guidelines

Target Allocation: 25-30% of a total portfolio in GPIX/SPYI combination:

• 15-18% in GPIX

• 10-12% in SPYI

Rebalancing Frequency: Quarterly review with annual rebalancing to maintain target weights

Tax Considerations: SPYI's return of capital advantages make it suitable for taxable accounts, while GPIX works well in either taxable or tax-advantaged accounts.

Market Timing: Both funds can be accumulated during market volatility when option premiums are elevated, enhancing future income potential.

Current Market Assessment

Currently, most mega-cap holdings are exhibiting overbought conditions. This indicates potential near-term pressure but also suggests attractive entry points may emerge for long-term income investors.

Covered call strategies can be particularly effective during periods of uncertainty, as their defensive characteristics become more valuable when traditional assets face pressure.

Conclusion: Building Sustainable Income

The addition of GPIX and SPYI to our Dividend Dynamo portfolio represents a mature approach to income investing. Rather than chasing the highest yields through risky instruments, we're building a foundation that can adapt to various market conditions while providing consistent monthly cash flows.

With GPIX and SPYI showing a high correlation (0.97) to each other, but differing in their strategic approaches, our combination leverages the best of both worlds: GPIX's flexibility for long-term total returns and SPYI's aggressive income generation for immediate cash flow needs.

The covered call strategy isn't perfect … it won't capture full bull market returns and provides limited downside protection. However, for investors prioritizing income generation over maximum capital appreciation, this professional-grade approach offers compelling risk-adjusted returns with the convenience of monthly distributions.

Our next installment will explore additional portfolio components as we continue building the complete Dividend Dynamo framework for regular investors seeking sustainable income in today's complex markets.