Markets continue to try to make sense of January’s economic data and how it aligns with expectations for the Fed rate hiking regime, with the major indexes logging their worst week all year last Friday. Advisors looking for higher income opportunities within their core allocations in a challenging environment should consider the NEOS ETF suite that utilizes tax-efficient index options while investing in equities, bonds, or cash alternatives.
The inflation narrative is proving to be a persistent one, with January’s CPI falling less than in previous months and the PPI report reflecting a 0.7% rise in producer prices month-over-month after falling a revised 0.2% in December. It’s well above the 0.2% average monthly gain pre-pandemic and is likely to lead to higher consumer prices in the coming months.
All of this economic data alongside the lowest unemployment rate in over four decades and an increase in retail sales in January could equate to potentially higher rate hikes at the March FOMC meeting, and interest rates being held higher for longer this year by the Fed, neither of which markets were priced for coming into 2023.
“We must remain prepared to continue rate increases for a longer period than previously anticipated if such a path is necessary to respond to changes in the economic outlook or to offset any undesired easing in conditions,” Lorie Logan, Dallas Fed President, said last Tuesday.
The tax-efficient ETFs from NEOS offer exposure to familiar allocations through equities, bonds, and cash alternatives (via ultra-short treasuries) while also utilizing options to seek to generate tax-efficient monthly income. The funds could be a good supplement to an income sleeve and complement existing core allocations without having to take on additional risk.
Income for the funds is added through options utilizing two different approaches: the NEOS S&P 500 High Income ETF (SPYI ) writes call spreads on equities while the NEOS Enhanced Income Aggregate Bond ETF (BNDI ) and the NEOS Enhanced Income Cash Alternative ETF (CSHI ) utilize put spreads.
All three funds use S&P 500 index options classified as Section 1256 contracts that have favorable tax rates: 60% of capital gains from the premiums are taxed as long-term and 40% are taxed as short-term, regardless of 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 options.
For more news, information, and analysis, visit the Tax Efficient Income Channel.
