Options-based strategies continue to attract money as investors broaden their income streams. Given its ongoing outperformance among peers, the NEOS S&P 500 High Income ETF (SPYI) warrants consideration for investors looking to increase their equity income allocations.
Strategies that use options to generate income may benefit during cycles of market volatility. Their ability to translate volatility into income makes them attractively positioned at the start of the fourth quarter, with a U.S. presidential election looming just a month away.
Image source: NEOS Investments
According to NEOS data, the fund generated total returns of 32.75% from its inception on Aug. 30, 2022, through the end of September. Notably, the fund offered a distribution rate of 12.11% as of Sept. 30. The distribution rate is calculated by annualizing the last distribution and dividing it by the fund’s most recent NAV at the time of distribution. This distribution rate proved the highest amongst the options income ETFs measured.
Broad Equity Exposure With Added Options Income
SPYI offers exposure to the S&P 500 alongside an options overlay strategy that generates high monthly income. It uses money earned from writing call options while also buying out-of-the-money call options on the S&P 500 Index. The out-of-the-money call options carry no intrinsic value because their price sits below the option contract’s strike price. NEOS actively manages the call options to capture gains in the underlying assets or minimize losses as markets rise and fall.
Volatility also benefits call-writing strategies. Call options carry a higher probability of reaching their strike price and becoming in-the-money during periods of volatility. Call writers receive compensation for this added risk in the form of higher premiums. This means that call options generate higher premiums during periods of elevated volatility, which translates to greater income potential for investors.
SPYI remains attractive not just for the high income it offers but also for the layers of tax efficiency. The fund uses 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.
SPYI’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%.
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