Advisors and investors wanting to optimize or enhance their core equity holdings for income and tax efficiency should consider the NEOS S&P 500 High Income ETF (SPYI ). The popular fund offered notable distribution rates and performance over the last year and could benefit from heightened volatility.
Over the trailing 12-month period, SPYI offered total returns of 18.88%, according to Y-Charts data. The fund continues to draw closer to $3 billion in AUM on steady inflows. Currently, SPYI holds net assets of $2.83 billion, as of January 29, 2025.
Income investors looking to make the most of their S&P 500 exposure would do well to consider SPYI. The fund offers exposure to the S&P 500 while generating high monthly income through call options. It uses money earned from 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 underlying asset’s current price is below the call’s strike price. Should equities rise or fall, NEOS can actively manage the call options to capture gains in the underlying assets or minimize losses. Heightened volatility often benefits call-writing strategies as they earn higher premiums in volatile environments.
Layering in Tax Efficiency
SPYI combines high income with layers of tax efficiency. The fund uses index options, which are taxed favorably as Section 1256 Contracts under IRS rules. Options held at year’s end are treated as if sold at fair market value on the last market day. Any capital gains or losses are taxed as 60% long-term and 40% short-term, no matter how long investors hold them. This can offer noteworthy tax advantages.
The fund generated a distribution rate of 11.91% as of December 31, 2024. Distribution rate annualizes the most recent distribution and then divides by the fund’s NAV.
A portion of distributions may also qualify as return on capital (ROC). ROC distributions occur when some, or all, of an initial investment is returned. Some options strategies generate ROC as a return on the premiums earned instead of returning principal.
SPYI’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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