Harness the Equity Bull Run With This Outperforming Income ETF

The S&P 500 hit bull market territory last week from October 2022 lows, and the latest declining inflation print could prove a tailwind for equities. Investors seeking to capture the full potential of an equity bull run while optimizing income would do well to consider the outperforming NEOS S&P 500 High Income ETF (SPYI).

Headline inflation rose just 4% year-over-year and 0.1% month-over-month. It’s the slowest rate of gain in almost two years, reported CNBC, and a hopeful sign for investors that Fed policy is working.

Core inflation remains stubbornly persistent, however, rising 0.4% month-over-month and 5.3% year-over-year. The core inflation measurement excludes energy and food but is a better indicator of consumer pricing pressures.

Falling CPI is likely to be a strong boost to the recent equity rally that resulted in more participants and broader stock gains. Mega-cap and tech concentration that grew pronounced within the S&P 500 in the first months of the year is showing signs of easing. More stocks continue to participate in the recent rally beyond just the technology sector. The WSJ reported both greater individual and institutional investor participation recently as well.

“What we’re seeing is a fear of missing out,” Kristina Hooper, chief global market strategist at Invesco, told WSJ. “There’s been a significant portion of investors that have sat out since last fall, and they’ve seen the stock market go up and up.”

Capture the Full Income Potential of an Equity Bull Run

The NEOS S&P 500 High Income ETF (SPYI) remains a consistent outperformer among equity income ETFs this year. SPYI capitalizes on core equity allocations while also providing a tax-efficient income stream for portfolios.

Chart of SPYI's total returns through May (10.45%) and distribution yield of 12.29% compared to XYLD (7.89% returns, 8.41% distribution yield), JEPI (2.38% returns, 9.25% yield), DIVO *-1.78% returns, 4.81% yield), and SPY (1.54% returns, 9.52% yield).

Image source: NEOS

Advisors and investors continue to take note of SPYI’s performance in 2023. In the last month, SPYI had net flows of nearly $37.6 million, with substantial inflows in June. The ETF is well positioned to capitalize on income opportunities in the S&P 500 as the index rises. It also offers tax-efficient income, which can be a boon for portfolios during periods of economic weakening.

SPYI has a distribution yield of 12.29% as of May 31, 2023, and a 30-day SEC yield of 1.14% (SEC yield doesn’t include options income).

See more: “Don’t Miss Portfolio Yield Potential With NEOS Income ETFs

SPYI seeks to provide higher income through call options the fund writes and earns premiums on. It then can use the money earned from the written calls to buy long, out-of-the-money call options on the S&P 500 Index.

An out-of-the-money call option has no intrinsic value. That’s because the current price of the underlying asset is below the strike price of the call. Should equities rise or fall, NEOS can actively manage the call options to capture gains in the underlying assets or minimize losses.

The options that the fund uses are index options, taxed favorably as Section 1256 Contracts under IRS rules. Options held at the end of the year are treated like they were sold on the last market day of the year at fair value. Any capital gains or losses are taxed as 60% long-term and 40% short-term, no matter how long investors held them. This can offer noteworthy tax advantages.

The fund’s managers also engage in tax-loss harvesting opportunities throughout the year on the call options, equity holdings, or both.

SPYI has an expense ratio of 0.68%.

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