The U.S. may not officially be in a recession yet but it’s shaping up to be an earnings recession this season as more companies report misses than wins. As uncertainty and risk continue to compound in the U.S., more investors are moving to money markets and cash alternatives, and for good reason. The three-month Treasury bill is yielding close to 5% currently, and the NEOS Enhanced Income Cash Alternative ETF (CSHI) offers exposure.
An earnings recession occurs when there are two consecutive earnings seasons with negative growth. Earnings per share fell 4.6% for the S&P 500 in the fourth quarter of 2022 with expectations that this earnings season will end with the sharpest drop year-over-year since the onset of the pandemic in Q2 2022, reported Yahoo Finance at the beginning of earnings season.
Earnings recessions are not necessarily followed by an economic recession or even market underperformance, but the current economic environment alongside tightening lending conditions by banks are creating an environment of compounding the risk that is leading many investors and bank depositors to seek refuge in cash and cash alternatives.
Don’t Sleep on the Yields of CSHI
Cash and cash alternatives are appealing for the liquidity they offer and the stability they can provide when equities and/or bonds are underperforming. They’re seen as a safety net of sorts, and advisors are already putting cash allocations to work for them through funds like the NEOS Enhanced Income Cash Alternative ETF (CSHI).
CSHI is an actively managed ETF that generates high monthly income and is offering a distribution yield of 5.91%, as of March 31, 2023, and is trading at its highest price point since launch. The fund launched in August 2022 and is already garnering attention; year-to-date it’s brought in $30.5 million in net flows.
It’s an options-based fund that is 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.
Three-month T-bills are currently yielding 4.97%, higher than their long-term average of 4.17% and well above the 0.82% rates last year at this time according to YCharts data. The fund’s distributions carry a number of tax efficiencies that allow greater preservation of income generated.
See also: “NEOS ETFs Boost Income Tax Efficiency Potential for Portfolios“
The put options that the fund uses are not ETF options but instead are S&P 500 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 put options.
CSHI has an expense ratio of 0.38%.
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