Ongoing trade war and geopolitical tensions kicked off the final month of the first half as market volatility rose once more. In this year’s environment of uncertainty and heightened risks, investors would do well to consider hedged strategies for their equity portfolios. NEOS offers two ETFs that seek downside protection while also providing income.
After a month of hope on easing trade tensions between the U.S. and China, June kicked off with new 50% tariffs on steel and renewed negative rhetoric on U.S./China trade relations. The ongoing, unpredictable nature of U.S. tariffs, and rising geopolitical risks on the Ukraine and Russia front create heightened uncertainty in markets heading into summer.
The tariff-driven market crash in April and nebulous nature of tariff policy this year creates a general risk-off sentiment in markets. For advisors and investors looking to hedged strategies to mitigate further potential equity drawdowns, NEOS Investments offers two notable contenders within the space.
The NEOS Nasdaq-100 Hedged Equity Income ETF (QQQH) offers notable performance in the last year compared to the benchmark Nasdaq-100. It also boasts a distribution rate of 9.74% as of May 31, 2025. Distribution rate annualizes the most recent distribution and divides by the fund’s NAV. It’s what an investor would earn in the next year should distributions remain the same.
QQQH invests in the Nasdaq-100, while using a put spread option collar on index options on the Nasdaq-100. The strategy writes calls to earn premiums for the fund, used for both income generation and to fund the purchase of out-of-the-money put spreads. At the same time, the fund also sells far-out-of-the-money puts to fund the put purchases as well as to generate income for the fund.
Using Volatility for Income & Enhanced Tax Efficiency
In addition to downside mitigation, the strategy benefits from market volatility. During periods of heightened volatility, options writing strategies earn higher premiums. It makes funds like QQQH well-positioned for the current environment and looking ahead.
QQQH also offers a layer of tax efficiency for investors. The options that QQQH uses are index options on the Nasdaq-100, they 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.
NEOS also actively manages the call options 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.
NEOS also offers the same strategy but within the S&P 500. The NEOS S&P 500 Hedged Equity Income ETF (SPYH) seeks to deliver reliable income within the S&P 500 while reducing downside risks. Launched on April 2, 2025, the fund generated a distribution rate of 7.94% as of the end of May.
Both funds carry an expense ratio of 0.68% and complement existing core portfolio exposures.
For more news, information, and analysis, visit the Tax-Efficient Income Channel.
