The anticipation of interest rate cuts have been spurring investors to add bonds before yields subsequently fall. Even so, they can still extract yield while adding core bond exposure with the NEOS Enhanced Income Aggregate Bond ETF (BNDI ).
That core bond exposure comes at a crucial juncture in the market after the more recent bout of volatility. Spooked investors are more inclined to add bonds now, not just for yield purposes, but as a fundamental counterbalance to an equity portfolio.
Bonds have historically been an ideal shock absorber when the stock market starts to swing toward the downside. With the S&P 500 falling about 5% within the last month, it’s an opportune time for investors to add core bond exposure.
That said, two of the more popular funds for core exposure are the iShares Core US Aggregate Bond ETF (AGG ) and the Vanguard Total Bond Market Index Fund ETF Shares (BND ). They encompass a wide variety of debt domestically and internationally, along with varying durations and credit risks for diversification.
As interest rates and subsequently yields fall from the Fed implementing looser monetary policy, bond prices will conversely rise. BNDI positions investors to capture that price appreciation with its fund-of-funds structure that includes both AGG and BND.
Actively Managed Income
BNDI seeks to distribute monthly income generated from investing in a representative portfolio of the U.S. aggregate bond market while also implementing a data-driven put option strategy. Since the strategy derives additional income from the sale of SPX Index options, the fund isn’t solely reliant on just bond income. That can help a fixed income investor diversify a portfolio that’s primarily dependent on bond yields.
Furthermore, the active management allows BNDI to maintain pliability and flexibility irrespective of the current market environment. That’s especially important given the complexity of using a data-driven put option strategy.
Lastly, there’s the tax benefits inherent in the fund’s strategy. BNDI takes advantage of tax-loss harvesting opportunities while also extracting more income from the market. The fund includes the sale of SPX Index options classified as section 1256 contracts. Those are subject to lower 60/40 tax rates. This is where the fund’s tax efficiency offers investors income while decreasing their tax burden.
As of July 31, BNDI has a distribution yield of 5.2% and a 30-day SEC yield of 2.89%. The fund has a net expense ratio of 0.58%.
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