Advisors and investors face a number of challenges in an environment of rising rates and recession risk. Optimizing income across core exposures to meet the challenges ahead could prove advantageous. The NEOS suite of ETFs provides tax-efficient income opportunities within core allocations.
The Fed indicated the likelihood of another rate increase before year’s end and fewer rate cuts next year than previously forecast. The labor market remains robust, with September job gains coming in much higher than expectations. All indicators further increase the odds of yet another interest rate hike by the end of the year.
As the Fed’s aggressive rate hiking regime continues, recession risk increases, with many economists and analysts anticipating a recession next year. It creates a challenging forward-looking environment of rising bond yields ( bond yields and prices move inverse to each other) and falling equities. In such an environment, making the most out of core allocation income streams through tax-efficiency could be highly beneficial.
Options-Based Income Opportunities in Core Exposures
- The (SPYI ) is actively managed and provides exposure to broad equities by investing in the S&P 500. It also employs an options strategy that entails writing short call options on the S&P 500 Index. The fund utilizes the premium earned from written calls to buy long, out-of-the-money call options. SPYI has an expense ratio of 0.68%.
- The (CSHI ) is an actively managed ETF that generates high monthly income and is options-based. CSHI is long on three-month Treasuries and also sells out-of-the-money SPX Index put spreads. These roll weekly to account for market changes and volatility.
- CSHI seeks to deliver 100–150 basis points above what 90-day Treasuries are yielding. It does so by utilizing put options that are S&P 500 index options. CSHI has an expense ratio of 0.38%.
- The (BNDI ) is actively managed and provides broad exposure to the bond market. It does so by investing in the (AGG ) and the (BND ).
- BNDI seeks to enhance the income and capital gains earned from its bond exposures by utilizing a put-option strategy on the S&P 500. This strategy entails selling short puts and buying long puts to protect against volatility. BNDI has an expense ratio of 0.58%.
Enhanced, Tax-Efficient Income for Investors
The options that all three ETFs utilize receive favorable tax treatment as Section 1256 Contracts under IRS rules. This means that the options held at the end of the year are treated as if they had been sold on the last market day of the year at fair market value.
Any capital gains or losses receive a tax treatment of 60% long-term and 40% short-term, regardless of how long the strategy invested in the options. This can offer noteworthy tax advantages, and the fund’s managers also may engage in tax-loss harvesting opportunities throughout the year on the put options.
NEOS also engages in tax-loss harvesting opportunities throughout the year as an active manager for all three funds.
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