BNDI Offers Better Returns, Tax-Efficient Income in Bonds

When the rate narrative changed in October, a veritable flood of money moved back into core bond exposures. As advisors and investors continue increasing their long-duration fixed income allocations, the NEOS Enhanced Income Aggregate Bond ETF (BNDI) is a fund to consider.

Money previously percolating in money market funds and short-duration strategies this year now flows into long-duration bonds. The dam has broken as investors now seize opportunities in Treasury yields given hopes of an end to rate hikes and potential rate cuts next year.

In the last month, nearly $3 billion in flows flooded into the iShares Core US Aggregate Bond ETF (AGG) and $1 billion net into the Vanguard Total Bond Market Index Fund ETF Shares (BND).

Total returns and price returns of BNDI, AGG, and BND YTD.

BNDI offers enhanced income opportunities in bonds and invests in the AGG and the BND. The fund has generated better total returns YTD than both funds.

Tax-Efficient Income in Bonds

The income and capital gains BNDI receives from its bond exposures are enhanced by adding monthly income from the fund’s put-option strategy on the S&P 500. The strategy includes selling short puts and buying long puts to protect against volatility.

The strategy may offer positive returns in both flat and rising equity markets. It may also generate positive returns in moderately declining equity markets. This is possible if the premium earned from the puts is greater than the cost to close out the positions. BNDI may also offer a lower correlation to certain risk factors such as duration, credit, and inflation risk.

BNDI’s put options aren’t ETF options but S&P 500 index options. These options are taxed favorably as Section 1256 Contracts under IRS rules. The IRS treats options held at the end of the year as if the investor had sold on the last market day of the year at fair market value. Most importantly, the IRS taxes any capital gains as 60% long-term and 40% short-term, no matter how long the fund held them.

This treatment can offer noteworthy tax advantages. In addition, the fund’s managers also may engage in tax-loss harvesting opportunities throughout the year on the put options.

BNDI carries a management fee of 0.58%.

For more news, information, and analysis, visit the Tax-Efficient Income Channel.