Markets remain frothy in the first quarter of 2024 as interest rate and economic uncertainty persist. Investors wanting to optimize the tax efficiency of their income this year should consider the suite of income ETFs from NEOS.
The NEOS suite of ETFs offers tax-efficient income across equities, bonds, and cash alternatives. The funds offer a good substitute or complement to existing core exposures in addition to more targeted equity exposure through their most recent ETF.
Enhance Core Allocations for Tax Efficiency
NEOS offers three different ETFs across core allocations for investors. The NEOS S&P 500 High Income ETF (SPYI) offers broad equity exposure through the S&P 500. The NEOS Enhanced Income Aggregate Bond ETF (BNDI) offers exposures across the broad bond market. Meanwhile, the NEOS Enhanced Income Cash Alternative ETF (CSHI) allows investors to capitalize on yields in ultra-short-duration Treasuries.
- SPYI is actively managed and provides exposure to broad equities by investing in the S&P 500. It also employs an options strategy that entails writing short call options on the S&P 500 Index. The ETF uses the premium earned from written calls to buy long, out-of-the-money call options. SPYI has an expense ratio of 0.68%.
- CSHI is an actively managed ETF that seeks high monthly income within short-duration exposures. The fund is long on three-month Treasuries and also sells out-of-the-money SPX Index put spreads. CSHI seeks to deliver 100-150 basis points above what three-month Treasuries currently yield. The fund has an expense ratio of 0.38%.
- BNDI is actively managed and provides broad exposure to the bond market. It does so by investing in the iShares Core U.S. Aggregate Bond ETF (AGG)and the Vanguard Total Bond Market ETF (BND).
BNDI seeks to enhance the income and capital gains earned from its bond exposures by using a put-option strategy on the S&P 500. The ETF has an expense ratio of 0.58%.
Targeted Nasdaq Exposure, Efficient Options
The newest fund to launch, the NEOS Nasdaq 100 High Income ETF (QQQI), seeks high monthly income by investing in the Nasdaq-100 Index. It also employs a call option strategy on the NDX and is actively managed. In its first month of trading, the fund generated a distribution yield of 14.42% as of 02/29/24. The fund has an expense ratio of 0.68%.
SPYI, BNDI, and CSHI utilize S&P 500 Index options to augment their income potential. The options used receive favorable tax treatment as Section 1256 Contracts under IRS rules. This means that the options held at the end of the year are treated as if they had been sold on the last market day of the year at fair market value.
Similar to the other funds, QQQI utilizes options on the NDX that qualify as section 1256 contracts and receive the same favorable tax treatment.
Any capital gains or losses receive a tax treatment of 60% long-term and 40% short-term. This treatment occurs regardless of how long the strategy invested in the options. This can offer noteworthy tax advantages, and the fund’s managers also may engage in tax-loss harvesting opportunities throughout the year on the put options.
However you’re looking to make income this year, NEOS offers a tax-efficient solution for portfolios.
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