Fixed income investors who have the majority of their portfolio in bonds are facing a heavy dose of uncertainty heading into 2025. That said, NEOS Investments has four options for income that also combines tax efficiency.
Moreover, these NEOS funds are actively managed. This allows experienced portfolio managers to adjust the holdings as necessary when market conditions warrant a change. This is like having built-in volatility control, which investors will need in the new year, especially when it comes to bonds.
“Right after the election, we saw an 18-basis-point pop in the 10-year, which was significant,” noted Karin Anderson, director of credit manager research at WTW, in a Chief Investment Officer article. “I don’t think we’re going to keep seeing big spikes like that, but everyone is focused on inflation right now. There are a lot of question marks about policies, and I do think we’re going to see higher volatility at the long end of the curve through the end of the year and into 2025.”
NEOS Options
That said, investors can mix their exposure to benchmark 20+ year Treasury debt with an active strategy that includes SPX index options with the NEOS Enhanced Income 20+ Year Treasury Bond ETF (TLTI). The fund utilizes a put option strategy that incorporates written (sold) and purchased put options on the SPX index. This allows investors to add to the income from the 20+ Treasury bonds and still maintain a low-risk profile.
Furthermore, these section 1256 options contracts are subject to 60/40 tax rates. This means that 60% of the contracts are held as long-term investments while 40% are short-term. The 60% exposure means are subject to lesser capital gains taxes, which are less for long-term investments (those held for more than a year).
This same strategy is also available for short-term debt with the NEOS Enhanced Income 1-3 Month T-Bill ETF (CSHI). This active fund seeks to distribute monthly income generated from investing in a portfolio of 1-3 month Treasury Bills. It can be an ideal option for investors looking to temporarily park cash and maximize income in a short-term bond fund as opposed to a money market account. It also uses the same SPX index options strategy and thus the same tax efficiency as TLTI.
Fixed income investors looking to complement a diversified bond portfolio can look to the NEOS Enhanced Income Aggregate Bond ETF (BNDI). It melds the broad exposure of two popular bond funds: the iShares Core US Aggregate Bond ETF (AGG) and the Vanguard Total Bond Market Index Fund ETF Shares (BND). However, it supercharges the income with the same data-driven SPX index options strategy along with the 60/40 tax efficiency.
Reaching for Higher Yield
Fixed income investors looking for additional yield don’t have to settle for the riskiest options. Funds like the NEOS Enhanced Income Credit Select ETF (HYBI) allocates assets that include high-yield securities combined with investment-grade. Once again, the fund is actively managed. It uses a proprietary model that uses a data-driven put option strategy to tailor its exposure to the market.
Under the hood, NEOS adds said exposure to other ETFs, Treasury bills as well as familiar SPX index options. Like the other aforementioned funds, HYBI’s tax efficiency comes from the sale of SPX Index options classified as section 1256 contracts, which are subject to lower 60/40 tax rates.
Rates below as of November 30 | ||
Fund | Distribution Rate | 30-day SEC Yield |
CSHI | 5.54% | 4.33% |
BNDI | 5.78% | 3.05% |
HYBI | 8.82% | 5.85% |
For more news, information, and analysis, visit the Tax-Efficient Income Channel.