In a year when investor uncertainty remained both pronounced and prolonged, optimizing core allocations became a significant priority. Equity income ETFs experienced record inflows this year, with the NEOS S&P 500 High Income ETF (SPYI) soaring above the competition in both yields and returns.
This year proved challenging for investors, with ongoing market volatility and persistent uncertainty regarding inflation, interest rates, geopolitical risk, and more. Although equities demonstrated surprising resilience in the first half, outperformance eroded into volatility and pronounced drawdowns in the second half.
Advisors and investors sought to boost the income opportunities in their core equity exposures this year through income options strategies.
Image source: NEOS
SPYI capitalizes on core equity allocations while also providing a tax-efficient income stream for portfolios. Though it currently trails the benchmark on a total return basis, SPYI offers significantly higher distribution yields over the measured time period. Since launch in August 2022, the ETF outperforms some of its largest income-focused peers in the category.
See also: “Move Confidently Into 2024 With NEOS ETFs“
SPYI Offers Equity Income and Opportunity
Given the diminished forecast for equities in the first half of 2024, optimizing existing exposures for income could prove beneficial.
The NEOS S&P 500 High Income ETF (SPYI) seeks to provide exposure to the S&P 500 and generate higher income through call options the fund writes and 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 year’s end are treated as if sold at fair market value on the last market day. Any capital gains or losses are taxed as 60% long-term and 40% short-term, no matter how long investors hold 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.