Even as Rates Fall, Maintain Yield With This High Income ETF

Irrespective of the economic data released early in 2024, the overall sentiment in the bond market is that rate cuts will happen sooner rather than later. When rates and subsequently yield drops, fixed income investors still have options such as the NEOS S&P 500 High Income ETF (SPYI).

Since all eyes are on the U.S. Federal Reserve and their decisions on interest rate policy, it will still add volatility to the fixed income market. Still, while the capital markets expect rates to subside, even safe haven government debt offers an attractive option at the current yield levels.

“There is a broader recognition that rates are moving lower this year and, while there is still going to be volatility, getting exposure to Treasury yields at 4% is attractive,” said Sinead Colton Grant, chief investment officer at BNY Mellon Wealth Management.

However, with a monthly distribution yield of just over 12% (as of December 31, 2023), SPYI can offer fixed income investors even greater opportunities for yield. Per its baseline fund description, SPYI seeks to provide exposure to the S&P 500 and generate higher income through call options the fund writes while also earnings premiums on these options. 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.

Actively Managed and Tax Efficient

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 these markets with relative accuracy and efficiency.

Active management also allows SPYI to be pliable under any market conditions. The portfolio managers can tailor the positions in the fund to suit the current market conditions and/or use a call laddering strategy, allowing for flexibility that can limit the downside and capitalize on any upside when the S&P 500 trends higher.

Furthermore, the fund also offers investors a tax efficiency component to help mitigate capital gains. Since SPX Index options are classified as section 1256 contracts, they are subject to lower 60/40 tax rates.

“SPYI may be considered as an alternative to existing core equity allocations to provide a tax efficient monthly income stream, while maintaining the opportunity for upside participation when market conditions warrant,” the fund’s fact sheet noted.

Tax-efficient monthly income is a prime feature of NEOS funds. To get a glimpse of how their 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.