VIDEO: ETF of the Week: IWMI

Chuck Jaffe: One fund, on point for today. The expert to talk about it. Yes, this is the ETF of the Week, where we get the latest take from Todd Rosenbluth, the head of Research at VettaFi. And if you go to VettaFi.com, you’ll find all the tools you need to be a savvier, smarter ETF investor, and to get more details on the new, newsworthy, trending, and timely ETFs that we talk about here.

Todd Rosenbluth, it’s great to chat with you again.

Todd Rosenbluth: It’s great to be with you again, Chuck.

Chuck Jaffe: Your ETF of the Week is…

Todd Rosenbluth: The NEOS Russell 2000 High Income ETF (IWMI).

Chuck Jaffe: IWMI. The NEOS Russell 2000 High Income fund. You know, Todd, in that introduction I mentioned new and newsworthy. This is a new fund. What makes it newsworthy and worth looking at for us now?

Todd Rosenbluth: So, you folks may remember, in May we talked about one of NEOS’ other covered call ETFs. It’s SPYI, which is the S&P 500 with an income overlay on top of it in a tax-efficient manner from NEOS. This is the Russell 2000. The heavyweight within the small-cap index world. We think now is a good time to take a closer look at small-caps.

And that was a good time to take a closer look at income-generating strategies that are offering small-cap exposure. We think NEOS is an expert within the field. That’s why this relatively new fund has caught our eye.

Chuck Jaffe: This is a covered call fund, and it is a category of ETFs that have been gaining in popularity. They’ve also been gaining in criticism, because there are some folks who were like, wait, hold it; is this strategy really working, etc. Why do you like covered call funds?

Todd Rosenbluth: So, covered call strategies provide an income generation, and in this case, in a tax-efficient manner using active management. So, you can get income through other sources. The fed cut interest rates by 50 basis points. They’re on a path to continue to cutting interest rates. So, finding income through traditional fixed income means is becoming harder and harder.

This NEOS fund, this small cap strategy, has a yield over 15%. That’s how they’re  generating income using option strategies. We think that’s a very creative but yet a lower risk way of getting exposure to the small-cap space. Small-caps historically do well when the Fed is cutting interest rates.

Small-caps tend to do better, and we think this is a good way of getting small-cap exposure and boosting your income generation at the same time.

Chuck Jaffe: So, as we got into July and August, we saw a tremendous rally in small-caps. When the market had the hiccup it had around the Japanese carry trade, etc., in August, all of the gains basically evaporated pretty much overnight.

How is a covered call fund going to perform during that kind of volatility? Like, how much would you expect? Because this fund, although it lived through that, this fund is so new, I’m not sure we can say it did what we expected it to do. So, what would you expect from a covered call fund in this space versus, “I just owned the Russell 2000,” when we’re going through that kind of volatility?

Todd Rosenbluth: So you get exposure to the Russell 2000 stocks and their performance that you’d have tied to a traditional Russell ²⁰⁰⁰-based ETF. But you’re getting the income generation on top of that. So usually — not always, but usually — when there’s an income generation that’s going to limit some of the downside, that might happen to reduce the volatility of a strategy, because you’re getting the income on a consistent basis.

I would note that I think why we saw some of the gains for small-caps given up is that the expectation was the Fed was not going to be cutting rates as aggressively as people had originally thought. They did — 50 basis points, and more to come likely before the end of 2024 and into 2025. So, if you were looking at small-caps from a way to benefit from the Fed cutting interest rates, which should hopefully stimulate risk-taking in the equity marketplace, you’re going to be able to still get that, but with income generation on top benefiting from the expertise from NEOS.

This is all they do — covered call strategies, options-based strategies. There are some other firms that offer covered call strategies, where this is one of the many suites of products that they offer. This is what NEOS does. They’re one of the experts in this space. That’s why we like working with them.

Chuck Jaffe: Even though small-caps haven’t done well relative to the rest of the market, necessarily of late it’s an area that most investors, if they build some diversification in, will get covered. So, if somebody is hearing us talk, but they’ve already got small-cap funds, do they want this because they want that covered call exposure in the area?

Did they make this half of their small-cap exposure? Or, do you want this to replace your small-cap, like sell what you got, go with this. How does this play into a portfolio for you?

Todd Rosenbluth: So, I think this can complement an existing strategy and allocation to small-cap. So, typically, U.S.-equity-focused investors are going to have more in large-caps and then a more moderate slice in small-caps. I didn’t want to say small. A more moderate slice in small-caps. And so, this could complement an existing strategy. To me, it’s unlikely that people have no exposure to the small-cap space.

And yet, now this is a time for them to pay attention to. If they do, this is a lower risk, income-generating way of doing so. But this can complement — add an income overlay and income benefit — in an environment where income is a little harder to find than it was a week or two weeks ago.

Chuck Jaffe: Yeah, that’s the interesting side, because it’s the income more so than the small-cap. It’s the income from small-caps that is going to differentiate this from a standard small-cap index fund or what have you.

Todd Rosenbluth: That’s right. And so, 15% yields. That’s just a tremendous income opportunity for folks. So large-caps don’t offer that typically. Although if you’re covered call large-cap strategy, you certainly can have that income generation.

But small-caps tend to be nondividend-paying stocks. And even with the small-cap dividend ETFs, the yields are quite low. So we think this is a creative, very expert-focused way of getting income generation throughout the broader part of your equity portfolio, instead of just only having fixed income or income coming from the bond portion of your allocation.

Chuck Jaffe: It’s the NEOS Russell 2000 High Income ETF, IWMI. The ETF of the Week from Todd Rosenbluth at VettaFi. Todd, great to see you again. Look forward to doing this with you again next week.

Todd Rosenbluth: I’ll see you next week, Chuck.

Chuck Jaffe: The ETF of the Week is a joint production of VettaFi and Money Life with Chuck Jaffe. And yeah, I am Chuck Jaffe. I’d love it if you check out my hour-long weekday podcast by going to MoneyLifeShow.com, or by searching for it wherever you find your favorite podcasts. And if you’re searching for information on your favorite exchange traded funds, there’s no better place than VettaFi.com.

They’ve got all the tools you need to help yourself, and they’re on Twitter or X at @Vetta_Fi. Todd Rosenbluth, their head of research, my guest, he’s on X to at @ToddRosenbluth.

The ETF of the Week is here for you every Thursday. Make sure you don’t miss an episode by following along. And we’ll be back with another great ETF for you next week.

Until then, happy investing! 

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