Options-based strategies picked up steam in 2022 as advisors and investors searched for ways to mitigate volatility and increase income in a challenged, volatile market environment for equities and bonds alike. The was an actively managed fund launched in the latter half of the year and seeks to provide high-income opportunities for portfolios while also working to preserve the income generated through its options overlay in times of market stress.
SPYI seeks to fully replicate the S&P 500 Index and also utilizes a call options strategy layered on top. Call options give buyers the right to buy the underlying asset at a specific price (the strike price) within the timeframe of the contract, but they are not obligated to do so.
The fund writes call options that it earns premiums on while also using the money earned from the written calls to buy long, out-of-the-money call options on the S&P 500 Index. An out-of-the-money call option has no intrinsic value because the current price of the underlying asset is below the strike price of the call. Should the equity markets rise or fall, NEOS can actively manage the call options to capture gains in the underlying assets or minimize losses.
The options that the fund uses are not ETF options but instead are 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 call options or the equity holdings, or both.
SPYI seeks to generate income both through the dividends of the underlying equity assets as well as premiums earned from writing calls. As of December 30, 2022, SPYI had a of 12.05%.
The fund is expected to perform similarly in up markets as the S&P 500, though because of the call options the underlying assets may not engage as much on the upside. In down markets, the covered call premiums can be a potential boon that can offer some outperformance compared to the S&P 500.
SPYI has an expense ratio of 0.68%.