Worried About Rate Hikes? SPYI Makes Equities Count

The Fed signaled at the June FOMC meeting that rates could go higher for longer, and the meeting notes released today underscore the narrative. Making the most out of equity exposures in the second half should include optimizing equity income in tax-efficient ways. Advisors and investors would do well to consider the NEOS S&P 500 High Income ETF (SPYI) as more rate hikes loom and hold for longer.

The Fed minutes released today reflected the hawkish stance of the potential for more rate hikes, albeit at a slower rate. Of the 18 voting members, 16 expect at least one more quarter-point increase this year. Twelve expect two more quarter-point increases this year.

Recession odds still loom large in the second half. The Fed shuffled their estimates back a bit to the last quarter of 2023 and the first quarter of 2024. They also noted that inflation continues to fall slower than anticipated. Core inflation remains relatively unchanged in recent months, according to the minutes. This is “despite data and reports from business contacts indicating that supply chain constraints had continued to ease.”

Predicting the economic impact of the current monetary policy remains a challenge for the Fed, according to the minutes.

“Participants generally noted a high degree of uncertainty regarding the cumulative effects on the economy from both already-enacted monetary policy tightening and the potential additional tightening in credit conditions stemming from recent banking-sector developments,” the minutes revealed.

Such uncertainty is likely to prolong volatility as markets remain sentiment driven and highly reactionary to new economic data inputs.

When Rate Hikes Threaten, Optimize Your Equity Income With SPYI

While the monetary policy body paused for June, the likelihood of additional rate hikes remains elevated. This is due largely to labor market tightness and economic resiliency thus far. Getting the most out of equity exposures in a higher-rate environment could become even more important in the next six to twelve months.

The NEOS S&P 500 High Income ETF (SPYI) 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 05/31/2023. The fund also has a 30-day SEC yield of 1.14% (it doesn’t include options income).

SPYI seeks to provide higher income through call options the fund writes that it 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.