SPYI: Seek Income Within Equities As Positive Earnings Continue

The major equity indexes extended their rally Friday to close up for the month, buoyed by positive earnings from mega-cap companies this week. For advisors and investors looking to earn income within equities, the NEOS S&P 500 High Income ETF (SPYI) is worth consideration, given recent distribution yields ahead of the strong earnings season thus far.

The Dow Jones Industrial Average had its second-best month since January, and the S&P 500 closed the month up 1.5%, its second consecutive positive month despite banking sector concerns and volatility. With slightly over 50% of companies reporting earnings so far this season and 80% of those beating analyst expectations, it could be a boon for equities as recession risks continue to rise.

“The market should follow earnings,” Gina Bolvin, president of Bolvin Wealth Management, told CNBC. “That is the mother’s milk of the market.”

Recession looms large on the horizon and on the minds of consumers and investors alike. For those advisors looking to optimize their broad equity exposures and seek income within equities, SPYI is worth consideration. SPYI is up 3.92% YTD and has a distribution yield of 12.19% as of 03/31/2023.

SPYI is an actively managed fund launched last year and seeks to provide high-income opportunities for portfolios within equities, while also working to preserve the income generated through its options overlay in times of market stress. The fund seeks to fully replicate the S&P 500 Index and also utilizes a call options strategy layered on top — call options give buyers the right to buy the underlying asset at a specific price (the strike price) within the timeframe of the contract, but they are not obligated to do so.

SPYI seeks to provide higher income through call options the fund writes that it earns premiums on, and 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 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 not ETF options, but instead are index options that are taxed favorably 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, and, most importantly, any capital gains or losses are taxed as 60% long-term and 40% short-term no matter how long the options were held. This can offer noteworthy tax advantages, and the fund’s managers also may engage in tax-loss harvesting opportunities throughout the year on the call options or equity holdings, or both.

SPYI has an expense ratio of 0.68%.

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