This ETF Gives Active Yield Beyond Aggregate Bond Exposure

In the current macroeconomic environment, bond bulls are thriving. But fixed income investors seeking yield may be wondering where to look. One place is the NEOS Enhanced Income 1-3 Month T-Bill ETF (CSHI).

The drop in yields has been evident in U.S. Treasury yields, which have been falling since the expectation is that the Federal Reserve will loosen monetary policy this year. According to a Reuters poll of bond strategists, Treasury yields will remain level in the first half of the year and eventually fall in the latter half.

Avenues to Maintain or Increase Current Income Level

Bond bulls are primarily the ones to blame, as the Reuters report mentioned that yields in the benchmark 10-year Treasury note peaked at just over 5% in October 2023 before falling 120 basis points to end the year. Of course, bond prices move inversely with yield, so it’s essentially left fixed income investors wondering where to go next to maintain or increase their current level of income.

“Our forecast is for yields to remain unchanged for the first three months; and while that may sound really boring, that’s how bonds work,” said Steven Major, global head of fixed income research at HSBC, in the Reuters report.

“I feel very strongly the next big move in yields is downwards and will come in the second half of the year because markets need to see actual moves from the central bank rather than working on pure expectations,” he added.

CSHI seeks to distribute monthly income generated from investing in a portfolio of one- to three-month Treasury bills while implementing a put-option strategy on the S&P 500 index. This also allows CSHI to capture any upside in the S&P 500, thereby countering a fall in bond prices while adding exposure to ultra-short Treasury bills with an duration to mitigate rate risk.

Additionally, the active management component allows CSHI to also seek tax-loss harvesting opportunities that complement exposure to SPX Index options classified as section 1256 contracts. These contracts can help minimize taxes since they are subject to lower 60/40 tax rates.

Outpacing Aggregate Bonds

NEOS actively manages the fund, allowing investors to tap into the talent and deep experience of its portfolio management team. With its concentration on call options, leave this complexity to professionals. They can navigate through the current market with relative accuracy and efficiency.

CSHI can offer fixed income investors an ideal pairing with their core bond exposure. In a three-month time frame, the yield performance of CSHI and the broad-based iShares Core U.S. Aggregate Bond ETF (AGG) is apparent. Fixed income investors don’t need to ditch their aggregate bond exposure with a fund like AGG, but can use CSHI as a complement to their existing bond portfolio to obtain additional income.

CSHI Distribution Yield Chart

CSHI Distribution Yield data by YCharts

Tax-efficient monthly income is a prime feature of NEOS funds. To get a glimpse of how its full ETF product suite benefits investors from a tax efficient standpoint, click here.

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