Fed interest rate cuts continued this month, causing many investors to look to opportunities in longer duration bond strategies. However, Fed Chair Jerome Powell also reinforced the regulatory agency’s cautious approach to rate cuts, particularly looking ahead. Investors seeking to move out in duration but also balance that risk with short duration exposures should consider the NEOS Enhanced Income 1-3 Month T-Bill ETF (CSHI ).
Recent comments from Federal Reserve Chair Jerome Powell put a damper on rate cut enthusiasm in markets. Powell underscored a slow pace to rate cuts in opposition to market hopes for a more aggressive path. It brings into question the likelihood of a December rate cut and casts uncertainty over the rate path in 2025.
Investors wanting to balance their duration risk or hedge more defensively in ultra-short bonds should look to the NEOS Enhanced Income 1-3 Month T-Bill ETF (CSHI ). CSHI seeks to deliver 100-150 basis points above what 1-3 month Treasuries are yielding.
The fund currently has a distribution rate of 5.55% and a 30-day SEC yield of 4.54% as of 10/31/2024. Distribution rate annualizes the most recent distribution and then divides by the fund’s NAV.
CSHI Offers High Monthly Income and Low Duration Risk
CSHI is actively managed and 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.
The put options that the fund uses are not ETF options but instead are 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 options were held which can offer 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 some cases, it is a return on premium 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%.
For more news, information, and analysis, visit the Tax Efficient Income Channel.
