August’s PMI print lends further supporting evidence to a Federal Reserve interest rate cut later this month. Investors looking to harness opportunities within broad bonds should consider the NEOS Enhanced Income Aggregate Bond ETF (BNDI ) for its enhanced tax efficiency and income.
Last month’s ISM purchasing manager’s index reading came in below market expectations. Though the PMI reading of 47.2% fell in contraction territory yet again, it’s a marginal improvement from July’s 46.8% reading.
While this was a boon for interest rate cut hopes, investors weighed the potential implications of economic weakening as markets retreated. The Nasdaq fell 3.3%, and the Dow Jones Industrial Average shed 626 points on Tuesday.
Advisors and investors looking to increase their bond holdings ahead of rate cuts or diversify their equity portfolios shouldn’t overlook the NEOS Enhanced Income Aggregate Bond ETF (BNDI).
The fund offers a similar return profile this year to that of the iShares Core US Aggregate Bond ETF (AGG ) and the *Vanguard Total Bond Market Index Fund ETF Shares* (BND ). The fund invests in both AGG and BND while using options to enhance its monthly income. It offers a distribution rate of 5.76% as of 08/31/24. The distribution rate annualizes the most recent distribution and divides it by the fund’s NAV.
BNDI employs a put-option strategy on the S&P 500. The strategy sells short puts and buys long puts to protect against volatility. This creates the potential for positive returns in both flat and rising equity markets. It may also generate positive returns in moderately declining equity markets. BNDI may also offer a lower correlation to certain risk factors such as duration, credit, and inflation risk.
BNDI’s put options are S&P 500 index options, which are taxed favorably as Section 1256 Contracts under IRS rules. The IRS treats options held at the end of the year as if the investor had sold on the last market day of the year at fair market value. Most importantly, the IRS taxes any capital gains as 60% long term and 40% short term. This taxation applies no matter how long the fund holds the options.
This treatment potentially offers notable tax advantages. In addition, the fund’s managers may also engage in tax-loss harvesting opportunities throughout the year based on the put options.
BNDI currently has an expense ratio of 0.58%.
Investors looking to harness opportunities within broad bonds should consider the NEOS Enhanced Income Aggregate Bond ETF (BNDI) for its enhanced tax efficiency and income.
For more news, information, and analysis, visit the Tax Efficient Income Channel.
