Another year starts off with a volatile start for equities, and tech indexes in particular. Misses by Tesla and reporting declines in fourth-quarter deliveries weighed heavily on tech stocks on January 2. Given the range of risk factors facing the economy and markets in 2025, savvy investors would do well to consider strategies that reduce or even harness volatility within tech stocks.
The year kicked off with a rocky start for tech investors as the Nasdaq Composite closed down in the first trading day of the year, part of a larger five-day losing streak. However, tech stocks soared in trading on Friday, with the Nasdaq recovering to gain almost 1.5% in early afternoon trading, reported CNBC.
Such volatility may prove to only be a preview of what’s in store for the year. NEOS Investments offers two tax-efficient, options-based ETFs that invest in the Nasdaq-100, one focused on hedging losses while the other focuses on high income. The NEOS Nasdaq-100 Hedged Equity Income ETF (NUSI) and the NEOS Nasdaq 100 High Income ETF (QQQI) could prove notable complements to existing tech exposures this year.
Invest in the Nasdaq-100 & Hedge for Drawdowns
The revamped NUSI seeks tax-efficient monthly income for investors while offering a measure of downside protection within the Nasdaq-100. 2024 proved a strong year for the strategy, with NUSI ending the year up 25.97% on a total returns basis, according to Y-charts data.
NUSI invests in the Nasdaq-100 and uses a put spread option collar on index options on the Nasdaq-100. This entails writing calls to earn premiums for the fund, used for both income generation and to fund the purchase out-of-the-money put spreads.
It also buys puts that offer the potential for active downside mitigation in declining markets. At the same time, the fund sells far out-of-the-money puts to fund the put purchases as well as income generation for the fund.
The options that NUSI uses are index options on the Nasdaq-100 and qualify as Section 1256 contracts. These receive favorable tax treatment under IRS rules. The 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 at 60% long-term and 40% short-term, no matter how long they were held. A portion of the income earned from premiums also qualifies as a return on capital, providing tax deferment opportunities.
Harnessing Tech Volatility for Income
The NEOS Nasdaq 100 High Income ETF (QQQI) reaches its one-year anniversary at the end of this month. It generated strong performance in 2024, ending the year up 19.86% on a total return basis, and proved popular with advisors and investors. The fund holds nearly $740 million in assets as of 01/02/25 as the strategy drew interest and inflows for its ability to harness tech volatility for tax-efficient income.
QQQI is actively managed and also provides exposure to the Nasdaq-100 Index. It uses a data-driven covered call options strategy designed to generate high income potential. Covered calls entail buying an asset while also writing a call on the underlying asset. This generates a premium but also caps the upside potential should the underlying asset appreciate.
QQQI also uses a call spread to achieve its income goals. This spread allows for more of the underlying to potentially participate in upside market movements when they occur compared to indexed covered call option strategies. Similar to NUSI, QQQI uses index options that qualify as Section 1256 contracts, with all the associated tax-efficient benefits.
NEOS actively manages the options of both funds to capture gains in the underlying assets or minimize losses. In addition, the fund’s managers also engage in tax-loss harvesting opportunities throughout the year on the call options, equity holdings, or both.
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