As the end of the year draws closer, advisors and investors increasingly seek to optimize their portfolio’s tax efficiency. The NEOS High Income ETF suite is worth consideration, providing exposure across core asset classes while adding layers of tax efficient income.
Tax-loss harvesting kicks into high gear heading into the last two months of the year. For advisors and investors looking to harvest losses and move into tax-efficient income exposures or for those looking to populate their portfolio with a greater range of tax-efficient, options-based income strategies, the NEOS ETFs are worth a look.
The team at NEOS Investments brings over a decade of options-based ETF experience to its strategies. Members of the firm pioneered the first options-based ETFs on the market before joining together to found NEOS. The firm currently offers seven ETFs, six of them grounded in tax-efficient options investing across core assets.
NEOS offers three equity exposure income ETFs, including the popular NEOS S&P 500 High Income ETF (SPYI ). Also included within equities are the NEOS Nasdaq 100 High Income ETF (QQQI ) and the NEOS Russell 2000 High Income ETF (IWMI )).
NEOS also offers three fixed income exposures. These include the NEOS Enhanced Income Aggregate Bond ETF (BNDI ) and the NEOS Enhanced Income Cash Alternative ETF (CSHI ). The firm recently converted a mutual fund strategy to ETF while layering in options via the NEOS Enhanced Income Credit Select ETF (HYBI). BNDI offers broad bond market exposure while CSHI focuses on ultra-short duration bonds. HYBI uses a “fund of funds” approach to invest in U.S. high yield and investment-grade bonds.
See also: The Tax Implications of Your Short-Term Investments
Add Layers of Tax Efficiency to Your Income Portfolio
All six funds provide layers of tax efficiency for investors. The three equity funds use covered calls to generate premiums, while the fixed income funds use puts. The options used are index options that 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 portfolio held the options, thereby offering noteworthy tax advantages.
A portion of the distributions of the funds also may qualify as return of capital. These distributions are a return of some (or all) of the original investment made into an asset. In the case of options strategies, this may mean a return on premiums earned by an investment as opposed to principal, such as with the NEOS ETF suite. ROC distributions provide flexibility for investors, generally delaying taxes owed on the ROC income portion until an investor sells their holdings.
The fund’s managers may also engage in tax-loss harvesting opportunities throughout the year on the options. This may help hedge capital gains earned during the year, an additional benefit to investors.
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