February’s economic data continues to indicate resiliency and lends continued credence to the narrative of a more aggressive interest rate hike this month from the Fed as market volatility persists. Such an environment creates a number of challenges for portfolios, and advisors and investors seeking monthly income opportunities within the familiar risk profile of equities should consider the NEOS S&P 500 High Income ETF (SPYI ).
The jobs report for February reflected continued hiring, with 311,000 jobs added on a seasonally adjusted basis, well above pre-pandemic levels, and unemployment rose to 3.6%, its lowest in 53 years. Wage gains slowed in February but also remain above pre-pandemic levels.
The NEOS S&P 500 High Income ETF (SPYI ) is an actively managed fund launched last year and seeks to provide high-income opportunities for portfolios within equities while also working to preserve the income generated through its options overlay in times of market stress. The fund seeks to fully replicate the S&P 500 Index and also utilizes a call options strategy layered on top — call options give buyers the right to buy the underlying asset at a specific price (the strike price) within the timeframe of the contract, but they are not obligated to do so.
SPYI has a distribution yield of 12.06% as of 02/28/23 and seeks to provide higher income through call options the fund writes that it earns premiums on and then can use the money earned from the written calls to buy long, out-of-the-money call options on the S&P 500 Index. An out-of-the-money call option has no intrinsic value because the current price of the underlying asset is below the strike price of the call. Should equities rise or fall, NEOS can actively manage the call options to capture gains in the underlying assets or minimize losses.
The options that the fund uses are not ETF options but instead are index options that are taxed favorably 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, and, most importantly, any capital gains or losses are taxed as 60% long-term and 40% short-term no matter how long the options were held. This can offer noteworthy tax advantages, and the fund’s managers also may engage in tax-loss harvesting opportunities throughout the year on the call options or equity holdings, or both.
SPYI has an expense ratio of 0.68%.
For more news, information, and analysis visit the Tax-Efficient Income Channel.