NEOS ETFs Boost Income Tax Efficiency Potential for Portfolios

In a year of economic downturn and recession, advisors and investors remain focused on income preservation in a challenging market environment for stocks and bonds. Optimizing the tax efficiency of monthly distributions is one key method of preserving income and the NEOS suite of ETFs offers tax efficiency in spades.

The tax-efficient ETFs from NEOS offer exposure to familiar allocations through equities, bonds, and cash alternatives (via ultra-short Treasuries) while also utilizing options to seek to generate tax-efficient high monthly income.

The Benefits of Tax Efficiency in Options

Investors have been flooding into dividend and income strategies in the last 12 months as economic and market uncertainty persists, and there has been rising interest in ETFs that employ buy-write strategies that utilize options for additional income generation. The NEOS suite of income-seeking ETFs uses options through two different approaches: the NEOS S&P 500 High Income ETF (SPYI) writes call spreads on equities, while the NEOS Enhanced Income Aggregate Bond ETF (BNDI) and the NEOS Enhanced Income Cash Alternative ETF (CSHI) utilize put spreads.

NEOS offers enhanced tax efficiency on premiums generated from its options: whereas most distributions from options are taxed at normal income rates come tax season, the NEOS ETFs use S&P 500 index options classified as Section 1256 contracts that have favorable tax rates: 60% of capital gains from the premiums are taxed as long-term, and 40% are taxed as short-term, regardless of how long the options were held.

All three funds also issue part of their distributions as the return of capital which is a tax-deferred strategy where investors do not have to pay taxes on return of capital income in the current tax year. You can read more in detail about return of capital and how the NEOS funds employ this tax-efficient distribution type here: The Tax Advantages of Return of Capital Distributions.

Investing in Treasuries Comes With Added Tax Benefits

The NEOS Enhanced Income Cash Alternative ETF (CSHI) is a relative newcomer but has brought in $30 million in flows year-to-date. It’s appealing because it’s a cash alternatives fund that invests long on three-month Treasuries and also sells out-of-the-money SPX Index put spreads that roll weekly to account for market changes and volatility. It seeks to deliver 100–150 basis points above what 90-day Treasuries are yielding while also taking advantage of tax-loss harvesting opportunities and the tax efficiency of index options.

An added tax-efficient bonus of CSHI beyond the Section 1256 contract index options and the return of capital distributions is the added benefit that comes with investing in Treasuries: they are tax free at the state and local level. Interest earned on Treasuries is still taxed at the federal level but it is not subject to taxes for state tax returns, providing yet another level of tax-efficient income for portfolios.

The NEOS income-seeking ETF suite offers income opportunities within core asset classes that carry familiar risk profiles for advisors and investors while also optimizing the tax efficiency of the income earned as well as distributions. Advisors that choose to put their cash to work short-term with CSHI that has a distribution yield of 5.91% as of March 31, 2023 will also benefit from the added tax-savings that Treasuries provide.

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