The recently launched NEOS Nasdaq-100 Hedged Equity Income ETF (NUSI ) offers fresh opportunities for income and tech investors alike. The strategy seeks tax-efficient monthly income for investors while offering a measure of downside protection within the Nasdaq-100.
NUSI, formerly the Nationwide Nasdaq-100 Risk-Managed Income ETF, is now managed by NEOS Investments, the former subadvisors for the fund. The firm, home to pioneers of the options-based ETFs, now offers the strategy with a revamped risk profile and option strategy.
In its former iteration, NUSI sought to provide income and downside protection while capturing potential upside within the Nasdaq-100 through its option collar strategy. This entailed investing in the Nasdaq-100 and earning premiums from written options. The fund used the income earned to buy out-of-the-money put options on the Nasdaq-100 approximately 7%-10% below the current market price. It used a rules-based model to determine the option positions, resetting monthly.
While the strategy performed well during the COVID-19 pandemic, the incremental market declines of 2022 proved a challenge. NEOS, in acquiring the strategy, reworked the options collar to offer a different investing experience.
Under the Hood of NUSI
The actively managed NUSI now invests in the Nasdaq-100 and uses a put spread option collar on index options on the Nasdaq-100. This entails writing calls to earn premiums for the fund, used for both income generation and to fund the purchase out-of-the-money put spreads. However, these puts are closer to the money than the original strategy. This offers the potential for more active downside mitigation in declining markets. At the same time, the fund also sells far out-of-the-money puts to fund the put purchases as well as income generation for the fund.
The fund offers tech investors the potential for downside protection in declining markets, and income investors the potential to capitalize on tech volatility. During periods of heightened volatility, options writing strategies earn higher premiums. NUSI also offers layer of tax efficiency for investors.
The options that NUSI uses are index options on the Nasdaq-100 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.
NUSI has a net expense ratio of 0.68%.
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