Advisors and investors are flocking to bonds this year, despite the continued economic uncertainty in the U.S. The outlook for bonds remains challenged in the short term, but the mid-term outlook for bonds looks more stable with strong opportunity once the Fed levels off its rate-hiking regime.
Over $18 billion flowed into U.S. fixed income ETFs in January compared to just $880 million into U.S. equities, according to FactSet data. The money going into U.S. bonds is flowing into a broad range of exposures; in the last four weeks, the top ETFs for flows ranged across the duration spectrum, from strategies focused on 10- to 20-year Treasuries and one- to three-year short-term Treasuries to those spanning the entire bond market.
The NEOS Enhanced Income Aggregate Bond ETF (BNDI ) is an actively managed ETF that seeks to offer enhanced monthly income distributions for investors by investing across the broad U.S. Aggregate Bond Market while also implementing a tax-efficient options strategy that generates additional income. The fund invests in the Vanguard Total Bond Market ETF (BND ) and the *iShares Core U.S. Aggregate Bond ETF (AGG )* to gain broad exposure to the U.S. bond market.
BNDI currently has a distribution yield of 5.03% and a 30-day SEC yield of 1.83% as of January 31, 2022 and is offering better total returns than the broad bond market year-to-date.
The income and capital gains that BNDI receives from its bond allocations are enhanced by the addition of monthly income from the fund’s put option strategy on the S&P 500, which sells short puts while also buying long puts to protect for volatility.
The strategy is expected to offer positive returns in both flat and rising equity markets and can generate positive returns in moderately declining equity markets as long as the premium from the puts bought and sold is greater than the cost to close out the positions. Additional benefits of an options-based strategy can mean that the fund may offer a lower correlation to certain risk factors, including duration, credit, and inflation risk.
The put options that the fund uses are not ETF options but instead are S&P 500 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 put options.
BNDI currently has an expense ratio of 0.58%.
For more news, information, and analysis, visit the Tax-Efficient Income Channel.