Advisors and investors continue moving out on the yield curve as economic and inflation data lends credence to a potential interest rate cut this September. The NEOS Enhanced Income Aggregate Bond ETF (BNDI ) seeks tax-efficient, high monthly income within bonds and consistently outperforms the broad market and peers.
Headline PCE in June rose 2.5% on an annual basis and 0.1% month-over-month. The personal consumption expenditures price index is one closely watched by the Fed. A tame reading such as June’s creates further hope of interest rate cuts beginning in earnest in September. The PCE reading comes on the back of a robust second quarter GDP reading of 2.8% annualized growth.
Investors continue adding longer-duration exposures to their portfolios on the belief of declining rate risk. For advisors and investors looking to increase duration while optimizing their income for tax efficiency, BNDI is a fund to consider.
The ETFinvests in the iShares Core US Aggregate Bond ETF (AGG ) and the Vanguard Total Bond Market Index Fund ETF Shares (BND ). In addition to the income and capital gains earned on its bonds, the strategy uses options to further enhance monthly income.
BNDI employs a put-option strategy on the S&P 500. The strategy sells short puts and buys long puts to protect against volatility. This creates the potential for positive returns in both flat and rising equity markets. It may also generate positive returns in moderately declining equity markets. BNDI may also offer a lower correlation to certain risk factors such as duration, credit, and inflation risk.
The fund offers notable outperformance to both the benchmark Agg as well as peers since inception in August 2022. BNDI generated a total return of 3.52% as of 06/30/22 since inception, with a distribution yield of 5.08%. Distribution yield is calculated by annualizing the last distribution and dividing it by the fund’s most recent NAV at the time of distribution.
Layering in Tax Efficiency Within Bonds
BNDI’s put options are S&P 500 index options, which are taxed favorably as Section 1256 Contracts under IRS rules. The IRS treats options held at the end of the year as if the investor had sold on the last market day of the year at fair market value. Most importantly, the IRS taxes any capital gains as 60% long term and 40% short term. This taxation applies no matter how long the fund held the options.
This treatment can offer noteworthy tax advantages. In addition, the fund’s managers also may engage in tax-loss harvesting opportunities throughout the year on the put options.
BNDI currently has an expense ratio of 0.58%.
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