In a year of volatility and risk, cash alternatives continue to prove a notable choice by investors. The NEOS Enhanced Income 1-3 Month T-Bill ETF (CSHI ) recently crossed $500 million in AUM this week with distribution yields above 5.5%.
CSHI, launched in August 2022, offers enhanced, tax-efficient income within cash alternatives. The fund seeks to deliver 100-150 basis points above what 1-3 month Treasuries are yielding. CSHI currently has a distribution yield 5.54% and a 30-day SEC yield of 5.02% as of 06/30/2024.
The ETF is actively managed and run by a team with extensive experience in options-based investing. At a time of growing adoption of these types of strategies, the fund’s combination of high income with layers of tax efficiency continues to draw investor funding.
Layers of Tax Efficiency Within Cash Alternatives
CSHI seeks to generate high monthly income with its options-based strategy. It is long on three-month Treasuries and sells out-of-the-money SPX Index put spreads. These roll weekly to account for market changes and volatility.
In addition to the tax benefits of Treasury bills, the fund also utilizes S&P 500 index options. These options receive favorable tax treatment as Section 1256 Contracts under IRS rules. This means the options held at the end of the year are treated as if sold on the last market day of the year at fair market value.
Any capital gains or losses are taxed as 60% long-term and 40% short-term. Notably, this tax treatment applies regardless of how long the portfolio held the options, thereby offering noteworthy tax advantages.
A portion of CSHI’s distributions also qualify as Return of Capital. These distributions are a return of some (or all) of the original investment made into an asset. In the case of options strategies such as CSHI, this often means a return on premiums earned by an investment as opposed to principal.
The fund’s managers also may engage in tax-loss harvesting opportunities throughout the year on the put options. CSHI has an expense ratio of 0.38%.
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