In the current macroeconomic environment, fixed income investors may be hanging on the Federal Reserve’s every word. However, that doesn’t have to be the case with an enhanced income option like the NEOS Enhanced Income Aggregate Bond ETF (BNDI).
Heading into 2024, the prevailing sentiment was that the Fed would implement rate cuts. But to what degree and how often are the current unknowns. Economic data will certainly drive those decisions, as the Fed was performing a balancing act of raising interest rates without spinning the economy into a recession.
“Underpinning the Fed’s policies will be the basic data on the economy regarding the risk of recession and the movement of inflation,” confirmed Forbes, noting that the risk of a recession has fallen recently, according to a Wall Street Journal’s survey revealing that the average risk of a recession is now 39% in January 2024 versus 61% a year ago.
Fixed income investors had to take on a hefty dose of interest rate risk the past few years that have led to an increased demand for assets like short duration bonds. With recession risks dissipating, they can now step further out on the yield curve to extrapolate additional income albeit more duration risk.
However, bonds aren’t the only way to get additional yield. Enter BNDI, which incorporates additional market strategies to complement core bond exposure.
Additional Income No Matter How Bond Market Reacts
At the heart of BNDI is its active management strategy, which harnesses the market expertise of experienced portfolio managers. With its active management, the ETF seeks to distribute monthly income generated from investing in a representative portfolio of the U.S. aggregate bond market and implementing a data-driven put option strategy.
Because nobody knows exactly what the Fed will do next, active management allows BNDI to maintain pliability and flexibility in any market environment while also taking advantage of tax-loss harvesting opportunities. So with rate cuts or even rate increases, BNDI will allow for additional income regardless of how the bond market reacts to Fed interest rate policy maneuvers.
The fund includes the sale of SPX Index options classified as section 1256 contracts, which are subject to lower 60/40 tax rates. This is where the fund’s tax efficiency offers investors income while decreasing their tax burden.
BNDI currently has a net expense ratio of 0.58%. The distribution yield is 5.52% (as of 12/31/23), which is calculated by multiplying the most recent distribution by 12 to annualize it, and then dividing by the net asset value of the fund.
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