Alibaba: A Great Business Doesn’t Have To Be A Great Investment

In the world of income investing, yields are the sirens. A 5 % or even 8 % yield can get your attention; 10 % is already “high yield”; anything above 20 % often sets off alarm bells. So when you encounter an exchange-traded fund (ETF) advertising a 25 %+ yield, your first instinct should be caution.

Yet, there is one fund recently stirring conversation: FEPI (REX FANG & Innovation Equity Premium Income ETF). As of late 2025, FEPI is showing a distribution rate around 25.20 %. Yahoo Finance+4REX Shares+4REX Shares+4 That figure is eye-popping. It begs the question: Can such a yield ever be sustainable and acceptable for a “durable income investor”? Or is this simply a trap?

In this post, we’ll dissect FEPI, its mechanics, pros and cons, and then offer a framework for thinking when (if ever) such a yield might be appropriate in a more conservative or long-term income portfolio.

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What Is FEPI?

Strategy and Structure

FEPI is an actively managed ETF launched in October 2023. REX Shares+2REX Shares+2 Its goal: combine exposure to large tech and innovation names while generating income via option premiums (specifically covered calls). StockAnalysis+4REX Shares+4AInvest+4

Key operating points:

• FEPI invests in the Solactive FANG Innovation Index, which is composed of 15 equally weighted technology / innovation names. REX Shares+2AInvest+2

• On those stock positions, FEPI sells out-of-the-money call options to earn option premium income. Seeking Alpha+6REX Shares+6M1+6

• It reinvests option-premium proceeds (or holds them in cash/money market holdings) as part of its asset base. REX Shares+2M1+2

• It distributes monthly to shareholders. AInvest+3REX Shares+3M1+3

• Importantly, its “distribution rate” (i.e. the (latest monthly * 12) divided by NAV) is distinct from the SEC 30-day yield metric, which excludes option income. In FEPI’s case, the SEC yield has often been negative or near zero (i.e. its “net investment income” excluding option activity is minimal). StockAnalysis+3REX Shares+3REX Shares+3

Thus, much of FEPI’s yield comes from option income rather than underlying dividend or interest income from holdings.

Yield Profile & Distribution History

Some yield figures to anchor on:

• FEPI’s distribution rate is ~ 25.20 % (as of late 2025). M1+3REX Shares+3REX Shares+3

• The trailing-12-month dividend yield (derived from its past dividend payments versus current price) is also in the 25 %+ zone. StockAnalysis+4StockAnalysis+4Dividend+4

• However, the 30-day SEC yield, which measures more “core” income net of expenses and excluding option income, has been negative (e.g. –0.29 %). REX Shares

• Historically, the monthly payouts (ex-dividend history) have ranged from ~$0.82 to ~$1.15 per share in the past year. StockAnalysis+2REX Shares+2

In short: the headline yield is extremely high, but much of it is driven by option premiums rather than “organic” earnings.

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Why the Yield Seems “Too Good to Be True” — The Risks

A yield as high as 25 % typically indicates one (or more) of these red flags:

1. Erosion of Net Asset Value (NAV).
   Because the fund is effectively paying out option income (which may replicate a return of capital structure), over time the NAV can shrink if the capital is not sustainably replenished. In effect, you might be eating into your principal. Critics of FEPI point out that 100% of its distributions are classified as “return of capital” (ROC), meaning that it is not being paid out of earnings but rather by returning capital. AInvest
   This is a serious structural challenge: sustained ROC distributions without offsetting inflows can degrade capital over time.

2. Limited Upside Participation.
   Covered call strategies cap the upside. If the underlying tech stocks rally strongly, FEPI may miss out on much of those gains because the calls it sold will be exercised (or detract from upside). In bull markets, this drag can be painful. Seeking Alpha+3Seeking Alpha+3StockAnalysis+3

3. Sector Concentration / Lack of Diversification.
   FEPI is concentrated in 15 tech/innovation names. This amplifies exposure to tech-sector risk (e.g. regulatory change, shifting consumer preferences, valuation multiple compression). There is little in the way of sector or geographic hedges. Critics warn it is essentially a “high-yield tech bet.” Seeking Alpha+3AInvest+3M1+3

4. Volatility, Market Cycles, and Drawdowns.
   In a tech pullback, the covered call buffer might not offer robust downside protection. The option income might not sufficiently offset losses. Over long downturns, the capital erosion risk becomes acute.

5. Sustainability & Dependence on Option Market Conditions.
   The level of option premiums depends heavily on implied volatility. If volatility collapses, option income may drop, reducing future distributions. If volatility spikes, the underlying equities may move too violently for the strategy to control losses.

6. Tax & Return-of-Capital Complexity.
   ROC distributions often complicate tax treatment and basis adjustments. Some investors may misunderstand what they are getting. And for “durable income investors” (especially those relying on yield for living expenses), reliance on ROC is riskier than yield from dividends or interest.

Thus, from a risk perspective, FEPI is pushing many boundaries that a conservative or “durable income” investor would be wary of.

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So Why Is It Getting Attention?

Given the risks, why do some authors and analysts believe there’s a case for FEPI (or similar high-yield “FEPIs”) in an income portfolio? Several arguments are made:

1. A Unique Market Environment

Some believe we are in a “sweet spot” environment for option income strategies: low interest rates, modest volatility, still strong tech fundamentals, and fewer bond yields to compete with. In such a regime, the premium from writing options is generous. As one recent article put it, “FEPIs, with their 25%+ yields and hybrid risk profile, represent a durable solution for income-starved investors” in today’s fragmented fixed income world. AInvest

In effect, proponents argue that structural shifts in yields and volatility make high-yield option-income strategies more attractive than they have been historically.

2. Income Priority Over Capital Gains

For some income-focused or retired investors, stable, high monthly distributions can outweigh concerns about growth. Even if capital erodes somewhat, if the income is reliable and sufficient for needs, that may meet the investor’s goals. In this sense, FEPI is being treated less as a total return vehicle and more as an income machine.

3. Tactical Allocations Rather Than Core

Some see FEPI as a tactical or satellite holding, not the core of an income portfolio. In those cases, you limit allocation (say 5–10 %) and accept the risk for the yield.

4. Yield Differential as an “Opportunistic Window”

Because so few vehicles offer yields north of 20 %, the yield gap may entice investors to take risk they otherwise wouldn’t. If you believe that the current yield regime (low bond yields, elevated option premiums) will persist, then entering when yields are exceptionally high may offer more cushion.

Indeed, one Seeking Alpha article was titled “FEPI: Rare Moment When 25 %+ Yield Is Suitable For Durable Income Investors.” Seeking Alpha The author argues that FEPI is different from typical covered call funds and that its case has strengthened.

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When (If Ever) Could a 25 %+ Yield Be Reasonable for Durable Income Investors?

To make sense of such a high yield, a durable-income investor (one who depends on yield over many years) must ask: under what conditions does this make sense?

Here is a framework of conditions or guardrails to evaluate:

1. Distribution Sustainability

• The yield must be backed by sustainable options income (or underlying earnings), not just return of capital.

• There must be a buffer of retained capital or reinvested option proceeds to maintain NAV.

• Option income should not be eroded by lower volatility or shifting market conditions.

If distributions start to get cut or the NAV starts trending downward relentlessly, then the sustainability is broken.

2. Risk Budget & Position Size

• Any allocation to such a high-yield, high-risk vehicle should be modest relative to the portfolio (e.g. 5–10 % maximum).

• You must tolerate volatility and potential capital drawdowns.

• It should be treated as a “satellite income booster” rather than the foundation of the portfolio.

3. Time Horizon & Flexibility

• The investor must have a sufficiently long horizon to ride out volatile periods.

• You need flexibility to withdraw or reallocate if conditions become unfavorable.

• If you are living entirely off yield (no margin for principal loss), this is much more dangerous.

4. Diversification & Hedging

• Use alongside more stable yield instruments (bonds, dividend equities, other option-income funds).

• Consider hedges or options overlays to protect downside.

• Avoid over-concentration in a single sector (FEPI already fails here).

5. Exit Plan & Monitoring

• Have rules for when to trim or exit (e.g. declining distributions, structural shifts in volatility).

• Monitor metrics such as NAV erosion, option income trends, underlying volatility, and relative valuation.

6. Tax Awareness

• Understand how return-of-capital distributions affect cost basis and taxable events.

• Be sure that the net after-tax yield still justifies the risk.

If a yield passes all the stress tests above and still seems attractive, then it might warrant a modest allocation.

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A Hypothetical Example: FEPI in a Mixed Income Portfolio

Let’s imagine a hypothetical investor, “Anna,” who is 60, semi-retired, and wants to build a durable income portfolio that can support annual withdrawals of ~4 % while preserving capital over time.

She builds a core portfolio of:

• 40 % high-grade bonds or bond ETFs

• 30 % dividend-paying equities (diversified sectors)

• 10 % stable alternative income vehicles (e.g. covered-call ETFs with moderate yields)

• 5–8 % allocation to riskier high-yield option-income vehicles like FEPI

• the rest in cash, hedges, or opportunistic allocations

In this schema, FEPI is not the foundation but the “tilt”—the part of the portfolio that aims to boost yield aggressively. Anna knows that if FEPI’s NAV erodes, she will trim or exit. She hopes that over a cycle, the option-premium income will offset some downside and deliver high yield.

Even so, she must accept that in a strong bull tech market, FEPI may underperform simple equity exposure, and in a tech crash, she could suffer capital loss.

Thus, FEPI's yield amplifies the upside of income—but also amplifies risk.

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FEPI: How It Has Performed So Far

It’s still early days for FEPI, but we can glean some performance context.

• Over short horizons, FEPI has shown mixed results. On a one-year basis, it has not dramatically outpaced or outperformed broad tech indices. StockAnalysis+4Yahoo Finance+4Finance Charts+4

• Some articles point out that FEPI has “relatively mild NAV erosion” so far. M1+2Seeking Alpha+2

• But critics warn that in more volatile or downward environments, the structural risks may reveal themselves. AInvest+2StockAnalysis+2

• Because FEPI is new (incepted 2023), its long-term track record is limited. REX Shares+2REX Shares+2

Thus, we do not yet have a full stress test over multiple market cycles.

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Comparing FEPI With Other Income Vehicles

To evaluate whether a 25 % yield is ever “reasonable,” we should contrast FEPI with other common income vehicles:

Type	Typical Yield Range	Strengths	Weaknesses (vs. FEPI)
High-quality corporate bonds / IG bond ETFs	3 %–7 %	More predictable principal stability and income	Much lower yield
Dividend-paying equities	3 %–6 %	Moderate growth and some yield	Lower yield, more volatility in dividends
Traditional covered-call ETFs on diversified indexes	6 %–12 %	More stable, diversified, lower risk	Lower yields, possibly less upside capture
Closed-end funds with leverage / special strategies	~7 %–15 % (or more in niche cases)	Higher yields, some structure	Often complex, illiquidity, discount risk
FEPI (or similar tech-option funds)	~20 %–30 % (if conditions favorable)	High yield if conditions hold	Extreme risk, NAV erosion, volatility, sector concentration

In the context of durable income investing, many advisors would counsel that too much yield is usually a symptom of hidden risk. FEPI occupies the extreme end of that spectrum.

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The Takeaway: Is a 25 %+ Yield Ever Justifiable?

My view: Yes, under very narrow circumstances, a 25 %+ yield instrument can be justifiable as a modest, speculative component of a diversified income portfolio—but it should never be treated as a core safe income source.

If I were writing the concluding guidelines for a durable-income investor considering FEPI, here’s what I would say:

1. Treat FEPI (or similar) as a satellite income booster, not a foundation.
   Keep allocation small (e.g. under 10 % of the portfolio) so that adverse outcomes won’t derail your plan.

2. Only invest if you understand the mechanics and risks.
   Do not be seduced by the yield alone—know what you’re getting into (ROC, NAV erosion, volatility).

3. Have strong monitoring, exit rules, and risk controls.
   If distributions decline materially, NAV falls persistently, or the underlying option environment weakens, reduce or exit.

4. Pair with safer income sources.
   The rest of the portfolio should be anchored in bonds, dividend equities, or moderate option strategies to provide stability.

5. View it as an “opportunistic yield window” rather than permanent capital deployment.
   When option premiums are high and volatility favorable, entry yields may give a cushion—if that window closes, be willing to exit.

6. Manage tax and basis complexity.
   Track return-of-capital distributions and ensure you understand how they affect your cost basis.

In essence, FEPI is not suitable for most income investors. But for those with a higher risk tolerance, willingness to actively manage, and a desire to squeeze extra yield from option markets, it might be a controlled gamble worth taking.