Equities continue to prove enormously attractive for advisors and investors as the summer draws to a close. For those looking to increase their equity allocations and enhance yield, the (SPYI ) is worth consideration.
Last week was another strong week for equities, with over $2 billion in flows going into the (SPY ) and four of the top five ETFs by flows focused within U.S. equities.
The (SPYI ) capitalizes on core equity allocations while also providing a tax-efficient income stream for portfolios. In a hypothetical portfolio, replacing broad equity exposure (as measured by SPY) with SPYI substantially enhanced portfolio yield.
From SPYI’s inception at the end of August last year, in a portfolio comprised of 55% equities, 35% bonds, and 10% Treasuries, SPYI contributed significant yield. Such a portfolio from August 30, 2022, to July 31, 2023, generated a yield of 8.32%. This is markedly above a hypothetical portfolio over the same period with equities represented by SPY that produced a portfolio yield of 2.49%. What’s more, it was a smoother ride, with lower standard deviation in the SPYI portfolio compared to the SPY portfolio.
SPYI Attracts Investors With Noteworthy Equity Yield
Advisors and investors continue to take note of SPYI’s performance in 2023. The AUM for SPYI is currently $237 million, with more inflows added almost daily. The ETF is well positioned to capitalize on income opportunities in the S&P 500 as the index rises. It also offers tax-efficient income, which can be a boon for portfolios during periods of economic weakening.
SPYI has a distribution yield of 12.10% as of July 31, 2023. The fund also has a 30-day SEC yield of 0.97% (SEC yield doesn’t include options income).
SPYI seeks to provide higher income through call options the fund writes and earns premiums on. It 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. That’s 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 index options, taxed favorably as Section 1256 Contracts under IRS rules. Options held at the end of the year are treated like they were sold on the last market day of the year at fair value. Any capital gains or losses are taxed as 60% long-term and 40% short-term, no matter how long investors held them. This can offer noteworthy tax advantages.
The fund’s managers also engage in tax-loss harvesting opportunities throughout the year on the call options, equity holdings, or both.
SPYI has an expense ratio of 0.68%.
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