Boost Your Core Portfolio Income Tax Efficiency With NEOS

The NEOS suite of actively managed income ETFs offers tax-efficient income across core holdings. These include equities, bonds, and cash alternatives. The funds offer a good substitute or complement to existing core exposures while enhancing tax efficiency.

NEOS offers two equity income ETFs, the NEOS S&P 500 High Income ETF (SPYI) and the NEOS Nasdaq 100 High Income ETF (QQQI). SPYI offers S&P 500 exposure alongside a laddered call options strategy on the S&P 500 Index. Meanwhile, QQQI offers exposure to the Nasdaq-100 Index and with a laddered call options strategy on the NDX. The call options generate premiums for the funds, enhancing income potential.

For investors looking for ultra-short duration or just to put their cash to work, the NEOS Enhanced Income 1-3 Month T-Bill ETF (CSHI) offers opportunity. The fund invests in one- to three-month Treasuries while selling out-of-the-money SPX put spreads. It seeks to generate yields 100-150 basis points above what three-month Treasuries currently yield.

Within bonds, NEOS offers the NEOS Enhanced Income Aggregate Bond ETF (BNDI). The fund provides broad exposure to the bond market by investing in the iShares Core U.S. Aggregate Bond ETF (AGG) and the Vanguard Total Bond Market ETF (BND). BNDI also uses a put-option strategy on the SPX to enhance income potential.

Total return levels of SPYI, CSHI, BNDI, and QQQI since each fund's inception.

Tax Efficiency in Spades

All of the NEOS income ETFs use Index options. Beyond providing liquidity, NEOS makes use of options that qualify as Section 1256 contracts under IRS rules. At the end of the year, regardless of how long an option was held, it’s treated as if sold on the last market day of the year at fair market value.

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 provides notable tax advantages for investors.

In addition to favorable options tax treatment, a portion of distributions are return of capital. These receive special tax treatment by allowing for tax deferment on any RoC income. This gives investors better control over their taxable income within a given year.

See also: “The Tax Advantages of Return of Capital Distributions

Finally, NEOS also engages in tax-loss harvesting throughout the year on the options. Combining the layers of tax efficiency provides investors with the opportunity to make the most of income earned from core allocations. SPYI and QQQI have expense ratios of 0.68%. The management fees for CSHI and BNDI are 0.38% and 0.58%, respectively.

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