Economic recession, side-stepping recession, rolling recession — there remains very little genuine consensus on what 2024 brings for the U.S. economy and markets. The high degree of uncertainty creates some challenges for advisors and investors alike. In such uncertain times, the NEOS suite of ETFs with exposure across core allocations is worth consideration for their high-income focus.
It’s rare to go into a new year with this level of uncertainty from analysts and economists. Inflation continues to decline but the Fed remains dogged in its determination to wrestle inflation back into a manageable 2% box. How that path continues to unfurl remains a looming market stressor alongside geopolitical risk and other significant risk factors.
Tax-Efficient Income for Any Market Environment
The NEOS suite of ETFs seeks to provide high, tax-efficient monthly income within core exposures. It’s a strategy that allows investors to make the most out of core allocations while uncertainty remains heightened.
The NEOS S&P 500 High Income ETF (SPYI) offers broad equity exposure through the S&P 500, while the NEOS Enhanced Income Aggregate Bond ETF (BNDI) offers exposures across the broad bond market. Meanwhile, the NEOS Enhanced Income Cash Alternative ETF (CSHI) allows investors to capitalize on yields in ultra-short-duration Treasuries.
All three funds use S&P 500 Index options to augment their income potential. The options used receive favorable tax treatment as Section 1256 Contracts under IRS rules. This means that the options held at the end of the year are treated as if they had been sold on the last market day of the year at fair market value.
Any capital gains or losses receive a tax treatment of 60% long-term and 40% short-term. This treatment occurs regardless of how long the strategy invested in the options. 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.
See also: “Income Opportunities in Bonds and Beyond”
NEOS Offers Income Across Core Allocations
SPYI is actively managed and provides exposure to broad equities by investing in the S&P 500. It also employs an options strategy that entails writing short-call options on the S&P 500 Index. The ETF uses the premium earned from written calls to buy long, out-of-the-money call options. SPYI has a distribution yield of 12.11% and a 30-day SEC yield of 1.04% as of 11/30/2023. The fund carries an expense ratio of 0.68%.
CSHI is an actively managed ETF that generates high monthly income and is options-based. The fund is long on three-month Treasuries and also sells out-of-the-money SPX Index put spreads. These roll weekly to account for market changes and volatility. CSHI seeks to deliver 100-150 basis points of performance above what 90-day Treasuries yield. The fund has a distribution yield of 5.53% and a 30-day SEC yield of 2.56% as of 11/30/2023. CSHI carries an expense ratio of 0.38%.
BNDI is actively managed and provides broad exposure to the bond market. It does so by investing in the iShares Core U.S. Aggregate Bond ETF (AGG) and the Vanguard Total Bond Market ETF (BND).
BNDI seeks to enhance the income and capital gains earned from its bond exposures by using a put-option strategy on the S&P 500. This strategy entails selling short puts and buying long puts to protect against volatility. The fund has a distribution yield of 6.15% and a 30-day SEC yield of 5.04% as of 11/30/2023. BNDI carries an expense ratio of 0.58%.
For more news, information, and analysis, visit the Tax-Efficient Income Channel.