Elevated equity concentration risk and interest rate uncertainty create a challenging and clouded near-term outlook. In ongoing uncertainty, investors continue to hunker down in short duration and cash alternatives.
Persistent inflation proved a blow to the market narrative this month regarding potential Fed interest rate cuts. Meanwhile, pronounced equity concentration continues unabated, creating heightened risk within stocks. Investor confidence remains precariously balanced and heavily reliant on earnings results and forward guidance within equities.
Markets and investors nervously await Nvidia earnings this afternoon as stocks continue a three-day slide. The chipmaker’s valuations grew exponentially in the last year, with stock prices up over 200% year-over-year. With the majority of equity gains in the last year attributed to just a handful of stocks such as Nvidia, a feeling of fragility permeates markets this earnings season.
“Can Nvidia hold up a market that is in need of a key catalyst?” Quincy Krosby, chief global strategist of LPL Financial, told CNBC. “Nvidia could deliver, as they did the last earning season, but it may not be enough for a market that is desperate for even more from the superstars.”
Opportunities Persist in Cash Alternatives
Short and ultra-short duration bonds remain popular with investors in ongoing uncertainty. In the last four weeks, one-fifth of top bond ETFs by flows were into short duration exposures according to ETFdb data. These funds present investors with a chance to put cash to work while waiting out market volatility
The NEOS Enhanced Income 1-3 Month T-Bill ETF (CSHI) seeks to deliver 100-150 basis points above what 1-3 month Treasuries are yielding. It’s noteworthy for its tax efficiency and monthly income-oriented strategy. Since January 1, net flows into CSHI have reached nearly $50 million as of 02/21/24. Last year the fund brought in $257 million in net flows.
CSHI is an actively managed ETF that seeks to generate high monthly income and is options-based. It is long on three-month Treasuries and sells out-of-the-money SPX Index put spreads. These roll weekly to account for market changes and volatility.
The fund also seeks to take advantage of tax-loss harvesting opportunities and the tax efficiency of index options. CSHI currently has a distribution yield of 6.03% and a 30-day SEC yield of 5.05% as of 01/31/2024.
The put options that the fund uses are not ETF options but instead are S&P 500 index options. These options receive favorable tax treatment as Section 1256 Contracts under IRS rules. This means the options held at the end of the year are treated as if sold on the last market day of the year at fair market value.
Any capital gains or losses are taxed as 60% long-term and 40% short-term. Notably, this tax treatment applies regardless of how long the options were held. 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. CSHI has an expense ratio of 0.38%.
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